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PRINCIPLES 



OF 



POLITICAL ECONOMY 



SOME OF THEIR APPLICATIONS TO SOCIAL PHILOSOPHY. 



BY 

JOHN STUAKT MILL. 



IN TWO VOLUMES. 

VOL. II. 

rBOM THE PIPTB LOXDOX EDITION. 



NEW YORK: 

D. APPLETON AND COMPANY, 

1920 



^ 



\U 



- vnsfer 
y Depc, 

SEP 2 3 1936 






CONTENTS 



OF THE SECOND VOLUME. 



BOOK III. 

exchange. — (Continued.) 
Chapter Vll. Of Money. 

PAOl 

§ 1. Purposes of a Circulating Medium, 17 

2. Gold and Silver, why fitted for those purposes, . . .19 

3. Money a mere contrivance for facilitating exchanges, which 

does not affect the laws of Value, 22 

Chapter VIII. Of the Value of Money, as dependent on 
Demand and Supply. 

§ 1. Value of Money, an ambiguous expression, .... 25 

2. The Value of Money depends, cseteris paribus, on its quantity, 26 

3. — together with the rapidity of circulation, ... 31 

4. Explanations and limitations of this principle, ... 33 

Chapter IX. Of the Value of Money, as dependent on 
Cost of Production. 

§ 1. The Value of money, in a state of freedom, conforms to the 

value of the bullion contained in it, 37 

2. — which is determined by the cost of production, . . 40 

3. This law, how related to the principle laid down in the pre- 

ceding chapter, 42 



4 CONTENTS. 

Chapter X. Of a Double Standard, and Subsidiary Coins. 

PAGB 

§ 1. Objections to a double standard, -.46 

2. The use of the two metals as money, how obtained without 

making both of them legal tender, ..... 48 

Chapter XI. Of Credit, as a Substitute for Money. 

§ 1. Credit not a creation but a transfer of the means of produc- 
tion, 50 

2. In what manner it assists production, 51 

3. Function of credit in economizing the use of money, . . 53 

4. Bills of exchange, 55 

5. Promissory notes, 60 

6. Deposits and cheques, . . . ... . .61 

Chapter XII. Influence of Credit on Prices. 

§ 1. The influence of bank notes, bills, and cheques, on price, a 

part of the influence of Credit, . . . . . .64 

2. Credit a purchasing power similar to money, ... 65 

3. Effects of great extensions and contractions of credit. Phe- 

nomena of a commercial crisis analyzed, .... 67 

4. Bills a more powerful instrument for acting on prices than 

book credits, and bank notes than bills, .... 72 

5. — the distinction of little practical importance, ... 75 

6. Cheques an instrument for acting on prices, equally power- 

ful with bank notes, 80 

7. Are bank notes money ? 83 

8. No generic distinction between bank notes and other forms 

of credit, 85 

Chapter XIII. Of an Inconvertible Paper Currency. 

§ 1. The value of an inconvertible paper, depending on its quan- 
tity, is a matter of arbitrary regulation, .... 88 

2. If regulated by the price of bullion, an inconvertible cur- 

rency might be safe, but not expedient, .... 91 

3. Examination of the doctrine that an inconvertible currency 

is safe if representing actual property, .... 93 



CONTENTS. 5 

PAOB 

4. — of the doctrine that an increase of the currency promotes 

industry, .96 

5. Depreciation of currency a tax on the community, and a 

fraud on creditors, 99 

6. Examination of some pleas for committing this fraud, . .100 



Chapter XIV. Of Excess of Supply. 

§ 1. Oan there be an oversupply of commodities generally? . 105 

2. The supply of commodities in general, cannot exceed the 

power of purchase, 107 

3. — never does exceed the inclination to consume, . .108 

4. Origin and explanation of the notion of general oversupply, . 110 

v Chapter XV. Of a, Measure of Value. 

§ 1. A Measure of Exchange Value, in what sense possible, . 114 

2. A Measure of Cost of Production, 116 



Chapter XVI. Of some Peculiar Cases of Value. 

§ 1. Values of commodities which have a joint cost of production, 120 
2. Values of the different kinds of agricultural produce, . . 123 

A Chapter XVII. Of International Trade. 

§ l. Cost of production not the regulator of international values, 126 

2. Interchange of commodities between distant places, deter- 

mined by differences not in their absolute, but in their 
comparative, cost of production, 128 

3. The direct benefits of commerce consist in increased effi- 

ciency of the productive powers of the world, . . . 131 

4. — n ot in a vent for exports, nor in the gains of merchants, . 132 

5. Indirect benefits of commerce, economical and moral ; still 

greater than the direct, 134 

Chapter XVIII. Of International Values. 

§ 1. The values of imported commodities depend on the terms of 

international interchange, 137 



CONTENTS. 

PASS 

2. — which depend on the Equation of International Demand, 139 

3. Influence of cost of carriage on international values, . . 144 

4. The law of values which holds between two countries, and 

two commodities, holds of any greater number, . . 145 

5. Effect of improvements in production, on international 

values, 149 

. The preceding theory not complete, 153 

7. International values depend not solely on the quantities de- 

manded, but also on the means of production available in 
each country for the supply of foreign markets, . . 155 

8. The practical result little affected by this additional element, 160 

9. The cost to a country of its imports, on what circumstances 

dependent, 163 



chapter XIX. Of Money, considered as an Imported 
Commodity. 

1. Money imported in two modes ; as a commodity, and as a 

medium of exchange, 166 

2. As a commodity, it obeys the same laws of value as other 

imported commodities, 167 

3. Its value does not depend exclusively on its cost of produc- 

tion at the mines, 170 



Chapter XX. Of the Foreign Exchanges. 

§ 1. Purposes for which money passes from country to country 

as a medium of exchange, 172 

2. Mode of adjusting international payments through the ex- 

changes, . . 173 

3. Distinction between variations in the exchanges which are 

self-adjusting, and those which can only be rectified 
through prices, 178 



Chapter XXI. Of the Distribution of the Precious Metals 
through the Commercial World. 

§ 1. The substitution of money for barter makes no difference in 
exports and imports, nor in the law of international 

values, 181 

2. The preceding theorem further illustrated, .... 185 



CONTENTS. 



PIQi 

8. The precious metals, as money, are of the same value, and 
distribute themselves according to the same law, with the 
precious metals as a commodity, 189 

4. International payments of a non-commercial character, . 191 



Chaptee XXII. Influence of Currency on the Exchanges 
and on Foreign Trade. 

§ 1. Variations in the exchange, which originate in the currency, 193 

2. Effect of a sudden increase of a metallic currency, or of the 

sudden creation of bank notes or other substitutes for 
money, 194 

3. Effect of the increase of an inconvertible paper currency. 

Real and nominal exchange, 199 



Chapter XXIII. Of the Rate of Interest. 

1. The rate of interest depends on the demand and supply of 

loans, 203 

2. Circumstances which determine the permanent demand and 

supply of loans, 205 

3. Circumstances which determine the fluctuations, . . . 208 

4. The rate of interest not really connected with the value of 

money, but often oonfounded with it, ... 210 

5. The rate of interest determines the price of land and of 

securities, 213 



Chapter XXIV . Of the Regulation of a Convertible 
Paper Currency. 

1. Two contrary theories respecting the influence of bank 

issues, 215 

2. Examination of each, 218 

3. Reasons for thinking that the Currency Act of 1844 pro- 

duces a part of the beneficial effect intended by it, . . 222 

4. — but produces mischiefs more than equivalent, . . . 228 

5. Should the issue of bank notes be confined to a single estab- 

lishment? 242 

6. Should the holders of notes be protected in any peculiar 

manner against failure of payment ? 245 



g CONTENTS. 

Chapter XXV. Of the Competition of different Countries 
in the same Market. 

PAGE 

§ 1. Causes which enable one country to undersell another, . 247 

2. Low wages one of those causes, . . . • . . . "250 

3. — when peculiar to certain branches of industry, . . 252 

4. — but not when common to all, . 254 

5. Some anomalous cases of trading communities examined, . 256 

Chapter XXYI. Of Distribution, as affected by 
Exchange. 

§ 1. Exchange and money make no difference in the law of 

wages,- 259 

2. In the law of rent, 262 

3. — nor in the law of profits, . . . . . . 263 



BOOK IV. 

INFLUENCE OF THE PROGRESS OF SOCIETY ON PRODUCTION 
AND DISTRIBUTION. 

Chapter I. General Characteristics of a Progressive 
State of Wealth. 

% 1. Introductory Remarks, 271 

2. Tendency of the progress of society towards increased com- 
mand over the powers of nature ; increased security ; and 
increased capacity of co-operation 272 

Chapter II. Influence of the Progress of Industry and 

Population on Values and Prices. 

§ 1. Tendency to a decline of the value and cost of production of 

all commodities, 278 

2. — except the products of agriculture and mining, which 

have a tendency to rise, 280 

3. — that tendency from time to time counteracted by improve- 

ments in production, 282 

4. Effect of the progress of society in moderating fluctuations of 

value 283 



CONTENTS. 9 

PAOB 

5. Examination of the influence of speculators, and in particu- 
lar of corn dealers, 285 



J 



Chapter III. Influence of the Progress of Industry and 
Population on Rents, Profits, and Wages. 

§ 1. First case; population increasing, capital stationary, . . 290 

2. Second case ; capital increasing, population stationary, . 294 

3. Third case ; population and capital increasing equally, the 

arts of production stationary, 295 

4. Fourth case ; the arts of production progressive, capital and 

population stationary, 296 

6. Fifth case ; all the three elements progressive, . . . 303 



Chapter IV. Of the Tendency of Profits to a Minimum. 

§ 1. Doctrine of Adam Smith on the competition of capital, . 308 

2. Doctrine of Mr. "Wakefield respecting the field of employ- 

ment, 310 

3. What determines the minimum rate of profit, . . . 312 

4. In opulent countries, profits habitually near to the minimum, 315 

5. — prevented from reaching it by commercial revulsions, . 318 

6. — by improvements in production, 320 

7. — by the importation of cheap necessaries and instruments, 322 

8. — by the emigration of capital, 324 



Chapter V. Consequences of the Tendency of Profits to a 
Minimum. 

§ 1. Abstraction of capital not necessarily a national loss, . . 327 
2. In opulent countries, the extension of machinery not detri- 
mental but beneficial to labourers, 330 



Chapter VI. Of the Stationary State. 

§ 1. Stationary state of wealth and population, dreaded and 

deprecated by writers, 334 

2. — but not in itself undesirable, 336 



10 CONTENTS. 

Chapter YII. On the probable Futurity of the Labouring 

Classes. 

PAG* 

§ 1. The theory of dependence and protection no longer appli- 
cable to the condition of modern society, . . . 341 

2. The future well-being of the labouring classes principally 

dependent on their own mental cultivation, . . . 346 

3. Probable effects of improved intelligence in causing a better 

adjustment of population — Would be promoted by the 
social independence of women, 348 

4. Tendency of society towards the disuse of the relation of 

hiring and service, 349 

5. Examples of the association of labourers with capitalists, . 353 

6. — of the association of labourers among themselves, . . 357 

7. Competition not pernicious, but useful and indispensable, . 378 



BOOK V. 

01" THE INFLUENCE OP GOVERNMENT. 

Chapter I. Of the Functions of Government in general. 

% 1. Necessary and optional functions of government distin- 
guished, 385 

2. Multifarious character of the necessary functions of govern- 

ment, 386 

3. Division of the subject, 392 

Chapter II. Of the General Principles of Taxation. 

§ 1. Four fundamental rules of taxation, 394 

2. Grounds of the principle of Equality of Taxation, . . 396 

3. Should the same percentage be levied on all amounts of in- 

come ? 398 

4. Should the same percentage be levied on perpetual and on 

terminable incomes ? 403 

5. The increase of the rent of land from natural causes a fit 

subject of peculiar taxation, 411 

6. A land tax, in some cases, not taxation, but a rent-charge in 

favour of the public, 414 

7. Taxes falling on capital, not necessarily objectionable, . . 415 



CONTENTS. IX 

Chapter III. Of Direct Taxes. 

PA OB 

1. Direct taxes either on income or on expenditure, . . .418 

2. Taxes on rent, 419 

3. — on profits, 420 

4. — on wages, 423 

5. An Income Tax, 425 

6. A House Tax, 429 



Chapter IV. Of Taxes on Commodities. 

i. A Tax on all Commodities would fall on profits, . . . 435 

2. Taxes on particular commodities fall on the consumer, . . 436 

3. Peculiar effects of taxes on necessaries, .... 438 

4. — how modified by the tendency of profits to a minimum, . 441 

5. Effects of discriminating duties, 447 

6. Effects produced on international exchange by duties on ex- 

ports and on imports, 451 



Chapter V. Of some other Taxes. 

§ 1. Taxes on contracts, . . . . "* . . . . 460 

2. Taxes on communication, 463 

3. Law Taxes, 465 

4. Modes of taxation for local purposes, 466 



Chapter VI. Comparison between Direct and Indirect 
Taxation. 

§ 1. Arguments for and against direct taxation, .... 468 

2. What forms of indirect taxation most eligible, . . . 473 

3. Practical rules for indirect taxation, 475 



Chapter VII. Of a National Debt. 

§ 1. Is it desirable to defray extraordinary public expenses by 

loans? 479 

2. Not desirable to redeem a national debt by a general con- 

tribution, 483 

3. In what cases desirable to maintain a surplus revenue for the 

redemption of debt, 485 



12 CONTENTS. 

Chapter VIII. Of the Ordinary Functions of Govern- 
ment considered as to their Economical Effects. 

pAoa 
§ 1. Effects of imperfect security of person and property, . . 489 

2. Effects of over-taxation, . . . . . . . 491 

3. Effects of imperfection in the system of the laws, and in the 

administration of justice, 493 



Chapter IX. The same subject continued. 

1. Laws of Inheritance, 499 

2. Law and Custom of Primogeniture, 501 

3. Entails, 506 

4. Law of compulsory equal division of inheritances, . . 508 

5. Laws of Partnership, 509 

6. Partnerships with limited liability. Chartered Companies, . 512 

7. Partnerships en commandite, 516 

8. Laws relating to Insolvency, 523 



Chapter X. Of Interferences of Government grounded on 
Erroneous Theories. 



1. Doctrine of Protection to Native Industry, . 

2. Usury Laws, 

3. Attempts to regulate the prices of commodities, 

4. Monopolies, 

5. Laws against Combination of Workmen, 

6. Restraints on opinion or on its publication, . 



531 
540 
545 
547 
549 
555 



Chapter XI. Of the Grounds and Limits of the Laisser- 
faire or Non-interference Principle. 

§ 1. Governmental intervention distinguished into authoritative 

and unauthoritative, 558 

2. Objections to government intervention — the compulsory 

character of the intervention itself, or of the levy of 
funds to support it, 560 

3. — increase of the power and influence of government, . 562 

4. — increase of the occupations and responsibilities of gov- 

ernment, 563 



CONTENTS. 13 



PAGE 



5. — superior efficiency of private agency, owing to stronger 

interest in the work, 565 

6. — importance of cultivating habits of collective action in 

the people, 566 

7. Laisser-faire the general rule, 569 

8. — but liable to large exceptions. Cases in which the con- 

sumer is an incompetent judge of the commodity. Edu- 
cation, 573 

9. Case of persons exercising power over others. Protection 

of children and young persons ; of the lower animals. 
Case of women not analogous, 577 

10. Case of contracts in perpetuity, 581 

11. Cases of delegated management, 582 

12. Cases in which public intervention may be necessary to 

give effect to the wishes of the persons interested. Ex- 
amples : hours of labour ; disposal of colonial lands, . 585 

13. Case of acts done for the benefit of others than the persons 

concerned. Poor Laws, 589 

14. — Colonization, 593 

15. — other miscellaneous examples, 599 

16. — Government intervention may be necessary in default of 

private agency, in cases where private agency would be 
more suitable, 602 



BOOK III. 



EXCHANGE. 



BOOK III. 
EXCHANGE. 

(CONTINUED.) 



CHAPTER VII. 

OF MONEY. 

§ 1. Having proceeded thus far in ascertaining the 
general laws of Value, without introducing the idea of 
Money (except occasionally for illustration), it is time that 
we should now superadd that idea, and consider in what 
manner the principles of the mutual interchange of com- 
modities are affected by the use of what is termed a Medi- 
um of Exchange. 

In order to understand the manifold functions of a Cir- 
culating Medium, there is no better way than to consider 
what are the principal inconveniences which we should ex- 
perience if we had not such a medium. The first and most 
obvious would be the want of a common measure for values 
of different sorts. If a tailor had only coats, and wanted 
to buy bread or a horse, it would be very troublesome to 
ascertain how much bread he ought to obtain for a coat, or 
how many coats he should give for a horse. The calcula- 
tion must be recommenced on different data, every time he 
41 



lg BOOK III. CHAPTER VII. §1. 

bartered his coats for a different kind of article ; and there 
could be no current price, or regular quotations of value. 
Whereas now each thing has a current price in money, and 
he gets over all difficulties by reckoning his coat at U. or 
51., and a four-pound loaf at 6d. or Id. As it is much easier 
to compare different lengths by expressing them in a com- 
mon language of feet and inches, so it is much easier to 
compare values by means of a common language of pounds, 
shillings, and pence. In no other way can values be ar- 
ranged one above another in a scale ; in no other can a 
person conveniently calculate the sum of his possessions ; 
and it is easier to ascertain and remember the relations of 
many things to one thing, than their innumerable cross re- 
lations with one another. This advantage of having a com- 
mon language in which values may be expressed, is, even 
by itself, so important, that some such mode of expressing 
and computing them would probably be used even if a 
pound or a shilling did not express any real thing, but a 
mere unit of calculation. It is said that there are African 
tribes in which this somewhat artificial contrivance actually 
prevails. They calculate the value of things in a sort of 
money of account, called macutes. They say, one thing is 
worth ten macutes, another fifteen, another twenty.* There 
is no real thing called a macute : it is a conventional unit, 
for the more convenient comparison of things with one an- 
other. 

This advantage, however, forms but an inconsiderable 
part of the economical benefits derived from the use of 
money. The inconveniences of barter are so great, that 
without some more commodious means of effecting ex- 
changes, the division of employments could hardly have 
been carried to any considerable extent. A tailor, who 
had nothing but coats, might starve before he could find 
any person having bread to sell who wanted a coat : be- 
sides, he would not want as much bread at a time as would 
be worth a coat, and the coat could not be divided. Every 

* Montesquieu, Esprit des Lois, liv. xxii. ch. 8. 



MONET. 19 

person, therefore, would at all times hasten to dispose of 
his commodity in exchange for anything which, though it 
might not be fitted to hi3 own immediate wants, was in 
great and general demand, and easily divisible, so that he 
might be sure of being able to purchase with it, whatever 
was offered for sale. The primary necessaries of life possess 
these properties in a high degree. Bread is extremely di- 
visible, and an object of universal desire. Still, this is not 
the sort of thing required : for, of food, unless in expecta- 
tion of a scarcity, no one wishes to possess more at once, 
than is wanted for immediate consumption ; so that a per- 
son is never sure of finding an immediate purchaser for arti- 
cles of food ; and unless soon disposed of, most of them 
perish. The thing which people would select to keep by 
them for making purchases, must be one which, besides be- 
ing divisible, and generally desired, does not deteriorate by 
keeping. This reduces the choice to a small number of 
articles. 

§ 2. By a tacit concurrence, almost all nations, at a 
very early period, fixed upon certain metals, and especially 
gold and silver, to serve this purpose. No other substances 
unite the necessary qualities in so great a degree, with so 
many subordinate advantages. Next to food and clothing, 
and in some climates even before clothing, the strongest in- 
clination in a rude state of society is for personal ornament, 
and for the kind of distinction which is obtained by rarity 
or costliness in such ornaments. After the immediate ne- 
cessities of life were satisfied, every one was eager to ac- 
cumulate as great a store as possible of things at once costly 
and ornamental ; which were chiefly gold, silver, and jewels. 
These were the things which it most pleased every one to 
possess, and which there was most certainty of finding others 
willing to receive in exchange for any kind of produce. 
They were among the most imperishable of all substances. 
They were also portable, and containing great value in small 
bulk, were easily hid ; a consideration of much importance 



20 BOOK III. CHAPTER VII. §2. 

in an age of insecurity. Jewels are inferior to gold and 
silver in the quality of divisibility ; and are of very various 
qualities, not to be accurately discriminated without great 
trouble. Gold and silver are eminently divisible, and when 
pure, always of the same quality ; and their purity may be 
ascertained and certified by a public authority. 

Accordingly, though furs have been employed as money 
in some countries, cattle in others, in Chinese Tartary cubes 
of tea closely pressed together, the shells called cowries on 
the coast of "Western Africa, and in Abyssinia at this day 
blocks of rock salt ; though even of metals, the less costly 
have sometimes been chosen, as iron in Lacedsemon from an 
ascetic policy, copper in the early Eoman republic* from 
the poverty of the people ; gold and silver have been gener- 
ally preferred by nations which were able to obtain them, 
either by industry, commerce, or conquest. To the qualities 
which originally recommended them, another came to be 
added, the importance of which only unfolded itself by 
degrees. Of all commodities, they are among the least in- 
fluenced by any of the causes which produce fluctuations 
of value. No commodity is quite free from such fluctu- 
ations. Gold and silver have sustained, since the beginning 
of history, one great permanent alteration of value, from 
the discovery of the American mines ; and some temporary 
variations, such as that which, in the last great war, was 
produced by the absorption of the metals in hoards, and in 
the military chests of the immense armies constantly in the 
field. In the present age the opening of new sources of 
supply, so abundant as the Ural mountains, California, and 
Australia, may be the commencement of another period of 
decline, on the limits of which it would be useless at present 
to speculate. But on the whole, no commodities are so 
little exposed to causes of variation. They fluctuate less 
than almost any other things in their cost of production. 
And from their durability, the total quantity in existence 
is at all times so great in proportion to the annual supply, 
that the effect on value even of a change in the cost of pro- 



MONEY. 21 

duction is not sadden : a very long time being required to 
diminish materially the quantity in existence, and even to 
increase it very greatly not being a rapid process. Gold 
and silver, therefore, are more fit than any other commodity 
to be the subject of engagements for receiving or paying a 
given quantity at some distant period. If the engagement 
were made in corn, a failure of crops might increase the 
burthen of the payment in one year to fourfold what was 
intended, or an exuberant harvest sink it in another to one- 
fourth. If stipulated in cloth, some manufacturing inven- 
tion might permanently reduce the payment to a tenth of 
its original value. Such things have occurred even in the 
case of payments stipulated in gold and silver ; but the 
great fall of their value after the discovery of America, is, 
as yet, the only authenticated instance ; and in this case 
the change was extremely gradual, being spread over a 
period of many years. 

When gold and silver had become virtually a medium 
of exchange, by becoming the things for which people gen- 
erally sold, and with which they generally bought, whatever 
they had to sell or to buy ; the contrivance of coining ob- 
viously suggested itself. By this process the metal was 
divided into convenient portions, of any degree of smallness, 
and bearing a recognised proportion to one another ; and 
the trouble was saved of weighing and assaying at every 
change of possessors, an inconvenience which on the occa- 
sion of small purchases would soon have become insupport- 
able. Governments found it their interest to take the oper- 
ation into their own hands, and to interdict all coining by 
private persons ; indeed, their guarantee was often the only 
one which would have been relied on, a reliance however 
which very often it ill deserved ; profligate governments 
having until a very modern period seldom scrupled, for the 
sake of robbing their creditors, to confer on all other debtors 
a licence to rob theirs, by the shallow and impudent artifice 
of lowering the standard ; that least covert of all modes of 
knavery, which consists in calling a shilling a pound, that 



22 BOOK III. CHAPTER VII. §3. 

a debt of a hundred pounds may be cancelled by the pay- 
ment of a hundred shillings. It would have been as simple 
a plan, and would have answered the purpose as well, to 
have enacted that " a hundred " should always be interpreted 
to mean five, which would have effected the same reduction 
in all pecuniary contracts, and would not have been at all 
more shameless. Such strokes of policy have not wholly 
ceased to be recommended, but they have ceased to be prac- 
tised; except occasionally through the medium of paper 
money, in which case the character of the transaction, from 
the greater obscurity of the subject, is a little less barefaced. 

§ 3. Money, when its use has grown habitual, is the 
medium through which the incomes of the different mem- 
bers of the community are distributed to them, and the mea- 
sure by which they estimate their possessions. As it is 
always by means of money that people provide for their 
different necessities, there grows up in their minds a power- 
ful association leading them to regard money as wealth in 
a more peculiar sense than any other article ; and even 
those who pass their lives in the production of the most 
useful objects, acquire the habit of regarding those objects 
as chiefly important by their capacity of being exchanged 
for money. A person who parts with money to obtain 
commodities, unless he intends to sell them, appears to the 
imagination to be making a worse bargain than a person 
who parts with commodities to get money ; the one seems 
to be spending his means, the other adding to them. Elu- 
sions which, though now in some measure dispelled, were 
long powerful enough to overmaster the mind of every 
politician, both speculative and practical, in Europe. 

It must be evident, however, that the mere introduction 
of a particular mode of exchanging things for one another, 
by first exchanging a thing for money, and then exchanging 
the money for something else, makes no difference in the 
essential character of transactions. It is not with money 
that things are really purchased. Nobody's income (except 



MONEY. 2S 

that of the gold or silver miner) is derived from the precious 
metals. The pounds or shillings which a person receives 
weekly or yearly, are not what constitutes his income ; they 
are a sort of tickets or orders which he can present for pay- 
ment at any shop he pleases, and which entitle him to re- 
ceive a certain value of any commodity that he makes choice 
of. The farmer pays his labourers and his landlord in these 
tickets, as the most convenient plan for himself and them ; 
but their real income is their share of his corn, cattle, and 
hay, and it makes no essential difference whether he dis- 
tributes it to them directly, or sells it for them and gives 
them the price ; but as they would have to sell it for money 
if he did not, and as he is a seller at any rate, it best suits 
the purposes of all, that he should sell their share along with 
his own, and leave the labourers more leisure for work and 
the landlord for being idle. The capitalists, except those 
who are producers of the precious metals, derive no part of 
their income from those metals, since they only get them 
by buying them with their own produce : while all other 
persons have their incomes paid to them by the capitalists, 
or by those who have received payment from the capitalists, 
and as the capitalists have nothing, from the first, except 
their produce, it is that and nothing else which supplies all 
incomes furnished by them. There cannot, in short, be in- 
trinsically a more insignificant thing, in the economy of 
society, than money ; except in the character of a contriv- 
ance for sparing time and labour. It is a machine for doing 
quickly and commodiously, what would be done, though 
less quickly and commodiously, without it : and like many 
other kinds of machinery, it only exerts a distinct and inde- 
pendent influence of its own when it gets out of order. 

The introduction of money does not interfere with the 
operation of any of the Laws of Value laid down in the pre- 
ceding chapters. The reasons which make the temporary 
or market value of things depend on the demand and sup- 
ply, and their average and permanent values upon their 
cost of production, are as applicable to a money system as 



24 BOOK III. CHAPTER VII. §8. 

to a system of barter. Things which by barter would ex- 
change for one another, will, if sold for money, sell for an 
equal amount of it, and so will exchange for one another 
still, though the process of exchanging them will consist of 
two operations instead of only one. The relations of com- 
modities to one another remain unaltered by money : the 
only new relation introduced, is their relation to money it- 
self; how much or how little money they will exchange 
for ; in other words, how the Exchange Value of money 
itself is determined. And this is not a question of any 
difficulty, when the illusion is dispelled, which caused money 
to be looked upon as a peculiar thing, not governed by the 
same laws as other things. Money is a commodity, and its 
value is determined like that of other commodities, tempo- 
rarily by demand and supply, permanently and on the aver- 
age by cost of production. The illustration of these prin- 
ciples, considered in their application to money, must be 
given in some detail, on account of the confusion which, in 
minds not scientifically instructed on the subject, envelopes 
the whole matter ; partly from a lingering remnant of the 
old misleading associations, and partly from the mass of 
vapoury and baseless speculation with which this, more 
than any other topic of political economy, has in latter 
times become surrounded. 1 shall therefore treat of the 
Value of Money in a chapter apart. 



CHAPTEE VIII. 

OF THE VALUE OF MONEY, AS DEPENDENT ON DEMAND 
AND SUPPLY. 

§ 1. It is unfortunate that in the very outset of the 
subject we have to clear from our path a formidable am- 
biguity of language. The Value of Money is to appearance 
an expression as precise, as free from possibility of misunder- 
standing, as any in science. The value of a thing, is what 
it will exchange for : the value of money, is what money 
will exchange for; the purchasing power of money. If 
prices are low, money will buy much of other things, and 
is of high value ; if prices are high, it will buy little of other 
things, and is of low value. The value of money is inversely 
as general prices : falling as they rise, and rising as they 
fall. 

But unhappily the same phrase is also employed, in the 
current language of commerce, in a very different sense. 
Money, which is so commonly understood as the synonyme 
of wealth, is more especially the term in use to denote it 
when it is the subject of borrowing. When one person lends 
to another, as well as when he pays wages or rent to an- 
other, what he transfers is not the mere money, but a right 
to a certain value of the produce of the country, to be 
selected at pleasure ; the lender having first bought this 
right, by giving for it a portion of his capital. What he 
really lends is so much capital ; the money is the mere in- 
strument of transfer. But the capital usually passes from 
the lender to the receiver through the means either of 



26 BOOK III. CHAPTER VIII. §2. 

money, or of an order to receive money, and at any rate 
it is in money that the capital is computed and estimated. 
Hence, borrowing capital is universally called borrowing 
money ; the loan market is called the money market : those 
who have their capital disposable for investment on loan 
are called the monied class : and the equivalent given for 
the use of capital, or in other words, interest, is not only 
called the interest of money, but, by a grosser perversion 
of terms, the value of money. This misapplication of lan- 
guage, assisted by some fallacious appearances which we 
shall notice and clear up hereafter,* has created a general 
notion among persons in business, that the Value of Money, 
meaning the rate of interest, has an intimate connexion with 
the Yalue of Money in its proper sense, the value or pur- 
chasing power of the circulating medium. We shall return 
to this subject before long : at present it is enough to say, 
that by Yalue I shall always mean Exchange Yalue, and 
by money the medium of exchange, not the capital which 
is passed from hand to hand through that medium. 

§ 2. The value or purchasing power of money depends, 
in the first instance, on demand and supply. But demand 
and supply, in relation to money, present themselves in a 
somewhat different shape from the demand and supply of 
other things. 

The supply of a commodity means the quantity offered 
for sale. But it is not usual to speak of offering money for 
sale. People are not usually said to buy or sell money. 
This, however, is merely an accident of language. In point 
df fact, money is bought and sold like other things, when- 
ever other things are bought and sold for money. Who- 
ever sells corn, or tallow, or cotton, buys money. Whoever 
buys bread, or wine, or clothes, sells money to the dealer 
in those articles. The money with which people are offer- 
ing to buy, is money offered for sale. The supply of money, 
then, is the quantity of it which people are wanting to lay 

* Infra, ch. xxiii. 



VALUE OF MONEY. £7 

out ; that is, all the money they have in their possession, 
except what they are hoarding, or at least keeping by them 
as a reserve for future contingencies. The supply of money, 
in short, is all the money in circulation at the time. 

The demand for money, again, consists of all the goods 
offered for sale. Every seller of goods is a buyer of money, 
and the goods he brings with him constitute his demand. 
The demand for money differs from the demand for other 
things in this, that it is limited only by the means of the 
purchaser. The demand for other things is for so much 
and no more ; but there is always a demand for as much 
money as can be got. Persons may indeed refuse to sell, 
and withdraw their goods from the market, if they cannot 
get for them what they consider a sufficient price. But 
this is only when they think that the price will rise, and 
that they shall get more money by waiting. If they thought 
the low price likely to be permanent, they would take what 
they could get. It is always a sine qua non with a dealer 
to dispose of his goods. 

As the whole of the goods in the market compose the 
demand for money, so the whole of the money constitutes 
the demand for goods. The money and the goods are seek- 
ing each other for the purpose of being exchanged. They 
are reciprocally supply and demand to one another. It is 
indifferent whether, in characterizing the phenomena, we 
speak of the demand and supply of goods, or the supply 
and the demand of money. They are equivalent expres- 
sions. 

We shall proceed to illustrate this proposition more fully. 
And in doing this, the reader will remark a great difference 
between the class of questions which now occupy us, and 
those which we previously had under discussion respecting 
Values. In considering; Value, we were onlv concerned 
with causes which acted upon particular commodities apart 
from the rest. Causes which affect all commodities alike, 
do not act upon values. But in considering the relation 
between goods and money, it is with the causes that operate 



28 BOOK III. CHAPTER VIII. §2. 

upon all goods whatever, that we are especially concerned. 
We are comparing goods' of all sorts on one side, with money 
on the other side, as things to be exchanged against each 
other. 

Suppose, everything else being the same, that there is 
an increase in the quantity of money, say by the arrival of 
a foreigner in a place, with a treasure of gold and silver. 
When he commences expending it (for this question it mat- 
ters not whether productively or unproductively), he adds 
to the supply of money, and by the same act, to the demand 
for goods. Doubtless he adds, in the first instance, to the 
demand only for certain kinds of goods, namely, those which 
he selects for purchase ; he will immediately raise the price 
of those, and so far as he is individually concerned, of those 
only. If he spends his funds in giving entertainments, he 
will raise the prices of food and wine. If he expends them 
in establishing a manufactory, he will raise the prices of la- 
bour and materials. But at the higher prices, more money 
will pass into the hands of the sellers of these different arti- 
cles ; and they, whether labourers or dealers, having more 
money to lay out, will create an increased demand for all 
the things which they are accustomed to purchase : these 
accordingly will rise in price, and so on until the rise has 
reached everything. I say everything, though it is of course 
possible that the influx of money might take place through 
the medium of some new class of consumers, or in such a 
manner as to alter the proportions of different classes of 
consumers to one another, so that a greater share of the 
national income than before would thenceforth be expended 
in some articles, and a smaller in others ; exactly as if a 
change had taken place in the tastes and wants of the com- 
munity. If this were the case, then until production had 
accommodated itself to this change in the comparative de- 
mand for different things, there would be a real alteration 
in values, and some things would rise in price more than 
others, while some perhaps would not rise at all. These 
effects, however, would evidently proceed, not from the 



VALUE OF MONET. 29 

mere increase of money, but from accessory circumstances 
attending it. We are now only called upon to consider 
what would be the effect of an increase of money, consid- 
ered by itself. Supposing the money in the hands of indi- 
viduals to be increased, the wants and inclinations of the 
community collectively in respect to consumption remaining 
exactly the same ; the increase of demand would reach all 
things equally, and there would be an universal rise of 
prices. We might suppose with Hume, that some morning, 
every person in the nation should wake and find a gold coin 
in his pocket : this example, however, would involve an 
alteration of the proportions in the demand for different 
commodities ; the luxuries of the poor would, in the first 
instance, be raised in price, in a much greater degree than 
other things. Let us rather suppose, therefore, that to every 
pound, or shilling, or penny, in the possession of any one, 
another pound, shilling, or penny, were suddenly added. 
There would be an increased money demand, and conse- 
quently an increased money value, or price, for things of 
all sorts. This increased value would do no good to any 
one ; would make no difference, except that of having to 
reckon pounds, shillings, and pence, in higher numbers. It 
would be an increase of values only as estimated in money, 
a thing only wanted to buy other things with ; and would 
'not enable any one to buy more of them than before. Prices 
would have risen in a certain ratio, and the value of money 
would have fallen in the same ratio. 

It is to be remarked that this ratio would be precisely 
that in which the quantity of money had been increased. 
If the whole money in circulation was doubled, prices would 
be doubled. If it was only increased one-fourth, prices 
would rise one-fourth. There would be one-fourth more 
money, all of which would be used to purchase goods of 
some description. When there had been time for the in- 
creased supply of money to reach all markets, or (according 
to the conventional metaphor) to permeate all the channels 
of circulation, all prices would have risen one-fourth. But 



30 BOOK Iff. CHAPTER VIII. §2. 

the general rise of price is independent of this diffusing and 
equalizing process. Even if some prices were raised more, 
and others less, the average rise would be one-fourth. This 
is a necessary consequence of the fact, that a fourth more 
money would have been given for only the same quantity 
of goods. General prices, therefore, would in any case be 
a fourth higher. 

The very same effect would be produced on prices if we 
suppose the goods diminished, instead of the money in- 
creased : and the contrary effect if the goods were increased, 
or the money diminished. If there were less money in the 
hands of the community, and the same amount of goods to 
be sold, less money altogether would be given for them, and 
they would be sold at lower prices ; lower, too, in the pre- 
cise ratio in which the money was diminished. So that the 
value of money, other things being the same, varies inversely 
as its quantity ; every increase of quantity lowering the 
value, and every diminution raising it, in a ratio exactly 
equivalent. 

This, it must be observed, is a property peculiar to 
money. We did not find it to be true of commodities gen- 
erally, that every diminution of supply raised the value 
exactly in proportion to the deficiency, or that every in- 
crease lowered it in the precise ratio of the excess. Some 
things are usually affected in a greater ratio than that of 
the excess or deficiency, others usually in a less : because, 
in ordinary cases of demand, the desire, being for the thing 
itself, may be stronger or weaker ; and the amount of what 
people are willing to expend on it, being in any case a 
limited quantity, may be affected in very unequal degrees 
by difficulty or facility of attainment. But in the case of 
money, which is desired as the means of universal purchase, 
the demand consists of everything which people have to 
sell ; and the only limit to what they are willing to give, 
is the limit set by their having nothing more to offer. The 
whole of the goods being in any case exchanged for the 
whole of the money which comes into the market to be laid 



VALUE OF MONEY. 31 

out, they will sell for less or more of it, exactly according 
as less or more is brought. 

§ 3. From what precedes, it might for a moment be 
supposed, that all the goods on sale in a country at any one 
time, are exchanged for all the money existing and in cir- 
culation at that same time : or, in other words, that there 
is always in circulation in a country, a quantity of money 
equal in value to the whole of the goods then and there on 
sale. But this would be a complete misapprehension. The 
money laid out is equal in value to the goods it purchases ; 
but the quantity of money laid out is not the same thing 
with the quantity in circulation. As the money passes from 
hand to hand, the same piece of money is laid out many 
times, before all the things on sale at one time are purchased 
and finally removed from the market : and each pound or 
dollar must be counted for as many pounds or dollars, as 
the number of times it changes hands in order to effect this 
object. The greater part of the goods must also be counted 
more than once, not only because most things pass through 
the hands of several sets of manufacturers and dealers before 
they assume the form in which they are finally consumed, 
but because in times of speculation (and all times are so, 
more or less) the same goods are often bought repeatedly, 
to be resold for a profit, before they are bought for the pur- 
pose of consumption at all. 

If we assume the quantity of goods on sale, and the 
number of times those goods are resold, to be fixed quanti- 
ties, the value of money will depend upon its quantity, to- 
gether with the average number of times that each piece 
changes hands in the process. The whole of the goods sold 
• (counting each resale of the same goods as so much added 
to the goods) have been exchanged for the whole of the 
money, multiplied by the number of purchases made on the 
average by each piece. Consequently, the amount of good.; 
and of transactions being the same, the value of money i- 
inversely as its quantity multiplied by what is called the 



32 BOOK III. CHAPTER VIII. §3. 

rapidity of circulation. And the quantity of money in cir, 
culation, is equal to the money value of all the goods sold, 
divided by the number which expresses the rapidity of cir- 
culation. 

The phrase, rapidity of circulation, requires some com- 
ment. It must not be understood to mean, the number of 
purchases made by each piece of money in a given time. 
Time is not the thing to be considered. The state of society 
may be such, that each piece of money hardly performs more 
than one purchase in a year ; but if this arises from the 
small number of transactions — from the small amount of 
business done, the want of activity in traffic, or because 
what traffic there is, mostly takes place by barter — it con- 
stitutes no reason why prices should be lower, or the value 
of money higher. The essential point is, not how often the 
same money changes hands in a given time, but how often 
it changes hands in order to perform a given amount of 
traffic. We must compare the number of purchases made 
by the money in a given time, not with the time itself, but 
with the goods sold in that same time. If each piece of 
money changes hands on an average ten times while goods 
are sold to the value of a million sterling, it is evident that 
the money required to circulate those goods is 100,000?. 
And conversely, if the money in circulation is 100,000?., 
and each piece changes hands by the purchase of goods ten 
times in a month, the sales of goods for money which take 
place every month must amount on the average to 1,000,000?. 

Rapidity of circulation being a phrase so ill adapted 
to express the only thing which it is of any importance k 
express by it, and having a tendency to confuse the subject 
by suggesting a meaning extremely different from the one 
intended, it would be a good thing if the phrase could be* 
got rid of, and another substituted, more directly significant 
of the idea meant to be conveyed. Some such expression 
as " the efficiency of money," though not unexceptionable, 
would do better ; as it would point attention to the quan- 
tity of work done, without suggesting the idea of estimating 



VALUE OF MONEY. 33 

it by time. Until an appropriate term can be devised, we 
must be content when ambiguity is to be apprehended, to 
express the idea by the circumlocution which alone conveys 
it adequately, namely, the average number of purchases 
made by each piece in order to affect a given pecuniary 
amount of transactions. 

§ 4. The proposition which we have laid down respect- 
ing the dependence of general prices upon the quantity of 
money in circulation, must be understood as applying only 
to a state of things in which money, that is, gold or silver, 
is the exclusive instrument of exchange, and actually passes 
from hand to hand at every purchase, credit in any of its 
shapes being unknown. "When credit comes into play as a 
means of purchasing, distinct from money in hand, we shall 
hereafter find that the connexion between prices and the 
amount of the circulating medium is much less direct and 
intimate, and that such connexion as does exist, no longer ad- 
mits of so simple a mode of expression. But on a subject so 
full of complexity as that of currency and prices, it is neces- 
sary to lay the foundation of our theory in a thorough un- 
derstanding of the most simple cases, which we shall always 
find lying as a groundwork or substratum under those which 
arise in practice. That an increase of the quantity of money 
raises prices, and a diminution lowers them, is the most ele- 
mentary proposition in the theory of currency, and without 
it we should have no key to any of the others. In any state 
of things, however, except the simple and primitive one 
which we have supposed, the proposition is only true other 
things being the same : and what those other things are, 
which must be the same, we are not yet ready to pronounce. 
"We can, however, point out, even now, one or two of the 
cautions with which the principle must be guarded in at- 
tempting to make use of it for the practical explanation of 
phenomena ; cautions the more indispensable, as the doc- 
trine, though a scientific truth, has of late years been the 
foundation of a greater mass of false theory, and erroneous 
42 



34 BOOK III. CHAPTER VIII. §4. 

interpretation of facts, than any other proposition relating 
to interchange. From the time of the resumption of cash 
payments by the Act of 1819, and especially since the com- 
mercial crisis of 1825, the favourite explanation of every rise 
or fall of prices has been "the currency;" and like most 
popular theories, the doctrine has been applied with little 
regard to the conditions necessary for making it correct. 

For example, it is habitually assumed that whenever 
there is a greater amount of money in the country, or in 
existence, a rise of prices must necessarily follow. But this 
is by no means an inevitable consequence. In no commod- 
ity is it the quantity in existence, but the quantity offered 
for sale, that determines the value. Whatever may be the 
quantity of money in the country, only that part of it will 
affect prices, which goes into the market of commodities, 
and is there actually exchanged against goods. Whatever 
increases the amount of this portion of the money in the 
country, tends to raise prices. But money hoarded does not 
act on prices. Money kept in reserve by individuals to 
meet contingencies which do not occur, does not act on 
prices. The money in the coffers of the Bank, or retained 
as a reserve by private bankers, does not act on prices until 
drawn out, nor even then unless drawn out to be expended 
in commodities. 

It frequently happens that money, to a considerable 
amount, is brought into the country, is there actually in- 
vested as capital, and again flows out, without having ever 
once acted upon the markets of commodities, but only upon 
the market of securities, or, as it is commonly though im- 
properly called, the money market. Let us return to the 
case already put for illustration, that of a foreigner landing 
in the country with a treasure. We supposed him to em- 
ploy his treasure in the purchase of goods for his own use, 
or in setting up a manufactory and employing labourers ; 
and in either case he would, cceteris paribus, raise prices. 
But instead of doing either of these things, he might very 
probably prefer to invest his fortune at interest ; which we 



"VALUE OF MONEY. 35 

shall suppose him to do in the most obvious way, by becom- 
ing a competitor for a portion of the stock, exchequer bills, 
railway debentures, mercantile bills, mortgages, &c, which 
are at all times in the hands of the public. By doing this 
he would raise the prices of those different securities, or in 
other words would lower the rate of interest ; and since this 
would disturb the relation previously existing between the 
rate of interest on capital in the country itself, and that in 
foreign countries, it would probably induce some of those 
who had floating capital seeking employment, to send it 
abroad for foreign investment, rather than buy securities at 
home at the advanced price. As much money might thus 
go out as had previously come in, while the prices of com- 
modities would have shown no trace of its temporary pres- 
ence. This is a case highly deserving of attention : and it 
is a fact now beginning to be recognised, that the passage 
of the precious metals from country to country is determined 
much more than was formerly supposed, by the state of the 
loan market in different countries, and much less by the 
state of prices. 

Another point must be adverted to, in order to avoid 
serious error in the interpretation of mercantile phenomena. 
If there be, at any time, an increase in the number of money 
transactions, a thing continually liable to happen from 
differences in the activity of speculation, and even in the 
time of year (since certain kinds of business are transacted 
only at particular seasons) ; an increase of the currency 
which is only proportional to this increase of transactions, 
and is of no longer duration, has no tendency to raise prices. 
At the quarterly periods when the public dividends arc paid 
at the Bank, a sudden increase takes place of the money in 
the hands of the public ; an increase estimated at from 
a fifth to two-fifths of the whole issues of the Bank of 
England. Yet this never has any effect on prices ; and in a 
very few weeks, the currency has again shrunk into its usual 
dimensions, by a mere reduction in the demands of the 
public (after so copious a supply of ready money) for accom- 



3g BOOK III. CHAPTER VIII. §4. 

modation from the Bank in the way of discount or loan. 
In like manner the currency of the agricultural districts 
fluctuates in amount at different seasons of the year. It is 
always lowest in August : " it rises generally towards Christ- 
mas, and obtains its greatest elevation about Lady-day, 
when the farmer commonly lays in his stock, and has to pay 
his rent and summer taxes," and when he therefore makes 
his principal applications to country bankers for loans. 
" Those variations occur with the same regularity as the 
season, and with just as little disturbance of the markets as 
the quarterly fluctuations of the notes of the Bank of Eng- 
land. As soon as the extra payments have been completed, 
the superfluous " currency, which is estimated at half a 
million, " as certainly and immediately is reabsorbed and 
disappears." * 

If extra currency were not forthcoming to make these 
extra payments, one of three things must happen. Either 
the payments must be made without money, by a re- 
sort to some of those contrivances by which its use is dis- 
pensed with ; or there must be an increase in the rapidity 
of circulation, the same sum of money being made to per- 
form more payments ; or if neither of these things took 
place, money to make the extra payments must be with- 
drawn from the market for commodities, and prices, conse- 
quently, must fall. An increase of the circulating medium, 
conformable in extent and duration to the temporary stress 
of business, does not raise prices, but merely prevents this 
fall. 

The sequel of our investigation will point out many 
other qualifications with which the proposition must be 
received, that the value of the circulating medium depends 
on the demand and supply, and is in the inverse ratio of the 
quantity ; qualifications which, under a complex system of 
credit like that existing in England, render the proposition 
an extremely incorrect expression of the fact. 

* Fullarton on the Regulation of Currencies, 2nd edit. pp. 81 — 9. 



CHAPTER IX. 

OF THE VALUE OF MONEY, AS DEPENDENT ON COST OF 
PRODUCTION. 

§ 1. But money, no more than commodities in general, 
has its value definitively determined by demand and supply. 
The ultimate regulator of its value is Cost of Production. 

We are supposing, of course, that things are leftto them- 
selves. Governments have not always left things to them- 
selves. They have undertaken to prevent the quantity of 
money from adjusting itself according to spontaneous laws, 
and have endeavoured to regulate it at their pleasure ; gen- 
erally with a view of keeping a greater quantity of money 
in the country, than would otherwise have remained there. 
It was, until lately, the policy of all governments to inter- 
dict the exportation and the melting of money ; while, by 
encouraging the exportation and impeding the importation 
of other things, they endeavoured to have a stream of money 
constantly flowing in. By this course they gratified two pre- 
judices ; they drew, or thought that they drew, more money 
into the country, which they believed to be tantamount to 
more wealth ; and they gave, or thought that they gave, to 
all producers and dealers, high prices, which, though no 
real advantage, people are always inclined to suppose to be 
one. 

In this attempt to regulate the value of money artificially 
by means of the supply, governments have never succeeded 
in the degree, or even in the manner, which they intended. 
Their prohibitions against exporting or melting the coin 
have never been effectual. A commodity of such small 



38 BOOK III. CHAPTER IX-. §1. 

bulk in proportion to its value is so easily smuggled, and 
still more easily melted, that it has been impossible by the 
most stringent measures to prevent these operations. All the 
risk which it was in the power of governments to attach to 
them, was outweighed by a very moderate profit.* In the 
more indirect mode of aiming at the same purpose, by throw- 
ing difficulties in the way of making the returns for exported 
goods in any other commodity than money, they have not 
been quite so unsuccessful. They have not, indeed, succeed- 
ed in making money flow continuously into the country ; but 
they have to a certain extent been able to keep it at a higher 
than its natural level ; and have, thus far, removed the value 
of money from exclusive dependence on the causes which fix 
the values of things not artificially interfered with. 

We are, however, to suppose a state, not of artificial 
regulation, but of freedom. In that state, and assuming no 
charge to be made for coinage, the value of money will con- 
form to the value of the bullion of which it is made. A 
pound weight of gold or silver in coin, and the same weight 
in an ingot, will precisely exchange for one another. On the 
supposition of freedom, the metal cannot be worth more in 
the state of bullion than of coin ; for as it can be melted 
without any loss of time, and with hardly any expense, this 
would of course be done until the quantity in circulation 
was so much diminished as to equalize its value with that of 
the same weight in bullion. It may be thought however 
that the coin, though it cannot be of less, may be, and being 
a manufactured article will naturally be, of greater value 
than the bullion contained in it, on the same principle on 
which linen cloth is of more value than an equal weight of 
linen yarn. This would be true, were it not that Govern- 

* The effect of the prohibition cannot, however, have been so entirely insig- 
nificant as it has been supposed to be by writers on the subject. , The facts ad- 
duced by Mr. Fullarton, in the note to page 1 of his work on the Regulation of 
Currencies, show that it required a greater percentage of difference in value be- 
tween coin and bullion than has commonly been imagined, to bring the coin to 
the melting-pot. 



VALUE OF MONEY. 39 

ment, in this country and in some others, coins money gratis 
for any one who furnishes the metal. The labour and ex- 
pense of coinage, when not charged to the possessor, do not 
raise the value of the article. If Government opened an 
office where, on delivery of a given weight of yarn, it re- 
turned the same weight of cloth to any one who asked for 
it, cloth would be worth no more in the market than the 
yarn it contained. As soon as coin is worth a fraction more 
than the value of the bullion, it becomes the interest of the 
holders of bullion to send it to be coined. If Government, 
however, throws the expense of coinage, as is reasonable, 
upon the holder, by making a charge to cover the expense 
(which is done by giving back rather less in coin than has 
been received in bullion, and is called levying a seignorage), 
the coin will rise, to the extent of the seignorage, above the 
value of the bullion. If the mint kept back one per cent, to 
pay the expense of coinage, it would be against the interest 
of the holders of bullion to have it coined, until the coin 
was more valuable than the bullion by at least that fraction. 
The coin, therefore, would be kept one per cent higher in 
value, which could only be by keeping it one per cent less 
in quantity, than if its coinage were gratuitous. 

The Government might attempt to obtain a profit by the 
transaction, and might lay on a seignorage calculated for 
that purpose ; but whatever they took for coinage beyond 
its expenses, would be so much profit on private coining. 
Coining, though not so easy an operation as melting, is far 
from a difficult one, and, when the coin produced is of full 
weight and standard fineness, is very difficult to detect. If, 
therefore, a profit could be made by coining good money, it 
would certainly be done : and the attempt to make seignor- 
age a source of revenue would be defeated. Any attempt 
to keep the value of the coin at an artificial elevation, not 
by a seignorage, but by refusing to coin, would be frustrated 
in the same manner.* 



* In England, though there is no seignorage on gold coin (the Mint returning 
in coin the same weight of pure metal which it receives in bullion), there is a 



40 BOOK III. CHAPTER IX. §2. 

§ 2. The value of money, then, conforms, permanently, 
and, in a state of freedom, almost immediately, to the value 
of the metal of which it is made ; with the addition, or not, 
of the expenses of coinage, according as those expenses are 
borne by the individual or by the state. This simplifies ex- 
tremely the question which we have here to consider : since 
gold and silver bullion are commodities like any others, and 
their value depends, like that of other things, on their cost 
of production. 

To the majority of civilized countries, gold and silver are 
foreign products : and the circumstances which govern the 
values of foreign products, present some questions which we 
are not yet ready to examine. For the present, therefore, 
we must suppose the country which is the subject of our in- 
quiries, to be supplied with gold and silver by its own 
mines, reserving for future consideration how far our con- 
clusions require modification to adapt them to the more 
usual case. 

Of the three classes into which commodities are divided 
— those absolutely limited in supply, those which may be 
had in unlimited quantity at a given cost of production, and 
those which may be had in unlimited quantity, but at an 
increasing cost of production — the precious metals, being 
the produce of mines, belong to the third class. Their 
natural value, therefore, is in the long run proportional to 
their cost of production in the most unfavourable existing 
circumstances, that is, at the worst mine which it is neces- 
sary to work in order to obtain the required supply. A 
pound weight of gold will in the gold-producing countries, 
ultimately tend to exchange for as much of every other com- 
modity, as is produced at a cost equal to its own ; meaning 

delay of a few weeks after the bullion is deposited, before the coin can be ob- 
tained, occasioning a loss of interest, which, to the holder, is equivalent to a 
trifling seignorage. From this cause, the value of coin is in general slightly 
above that of the bullion it contains. An ounce of gold, according to the quan- 
tity of metal in a sovereign, should be worth 3/. lis. 10^d.; but it was usually 
quoted at 3J. lis. 6d., until the Bank Charter Act of 1844 made it imperative 
on the Bank to give its notes for all bullion offered to it at the rate of 3/. 17s. 9cL 



VALUE OF MONEY. 41 

by its own cost the cost in labour and expense, at the least 
productive sources of supply which the then existing de- 
mand makes it necessary to work. The average value of 
gold is made to conform to its natural value in the same 
manner as the values of other things are made to conform 
to their natural value. Suppose that it were selling above 
its natural value ; that is, above the value which is an 
equivalent for the labour and expense of mining, and for 
the risks attending a branch of industry in which nine out 
of ten experiments have usually been failures. A part of 
the mass of floating capital which is on the look-out for in- 
vestment, would take the direction of mining enterprise ; 
the supply would thus be increased, and the value would 
fall. If, on the contrary, it were selling below its natural 
value, miners would not be obtaining the ordinary profit ; 
they would slacken their works ; if the depreciation was 
great, some of the inferior mines would perhaps stop work- 
ing altogether : and a falling off in the annual supply, pre- 
venting the annual wear and tear from being completely 
compensated, would by degrees reduce the quantity, and 
restore the value. 

"When examined more closely, the following are the 
details of the process. If gold is above its natural or cost 
value — the coin, as we have seen, conforming in its value to 
the bullion — money will be of high value, and the prices of 
all things, labour included, will be low. These low prices 
will lower the expenses of all producers ; but as their re- 
turns will also be lowered, no advantage will be obtained by 
any producer, except the producer of gold : whose returns 
from bis mine, not depending on price, will be the same as 
before, and his expenses being less, he will obtain extra 
profits, and will be stimulated to increase his production. 
E ' converso if the metal is below its natural value : since this 
is as much as to say that prices are high, and the money ex- 
penses of all producers unusually great : for this, however, 
all other producers will be compensated by increased money 
returns : the miner alone will extract from his mine no more 



42 BOOK III. CHAPTER IX. §3. 

metal than before, while his expenses will be greater : his 
profits therefore being diminished or annihilated, he will 
diminish his production, if not abandon his employment. 

In this manner it is that the value of money is made to 
conform to the cost of production of the metal of which it is 
made. It may be well, however, to repeat (what has been 
said before) that the adjustment takes a long time to effect, 
in the case of a commodity so generally desired and at the 
same time so durable as the precious metals. Being so 
largely used not only as money but for plate and ornament, 
there is at all times a very large quantity of these metals in 
existence : while they are so slowly worn out, that a com- 
paratively small annual production is sufficient to keep up 
the supply, and to make any addition to it which may be 
required by the increase of goods to be circulated, or by the 
increased demand for gold and silver articles by wealthy 
consumers. Even if this small annual supply were stopt 
entirely, it would require many years to reduce the quantity 
so much as to make any very material difference in prices. 
The quantity may be increased, much more rapidly than it 
can be diminished ; but the increase must be very great be- 
fore it can make itself much felt over such a mass of the 
precious metals as exists in the whole commercial world. 
And hence the effects of all changes in the conditions of 
production of the precious metals are at first, and continue 
to be for many years, questions of quantity only, with little 
reference to cost of production. More especially is this the 
case when, as at the present time, many new sources of sup- 
ply have been simultaneously opened, most of them prac- 
ticable by labour alone, without any capital in advance be- 
yond a pickaxe and a week's food, and when the operations 
are as yet wholly experimental, the comparative permanent 
productiveness of the different sources being entirely unas- 
certained. 

§ 3. Since, however, the value of money really con- 
forms, like that of other things, though more slowly, to its 



VALUE OF MONEY. 43 

sost of production, some political economists have objected 
altogether to the statement that the value of money depends 
on its quantity combined with the rapidity of circulation ; 
which, they think, is assuming a law for money that does 
not exist for any other commodity, when the truth is that it 
is governed by the very same laws. To this we may an- 
swer, in the first place, that the statement in question as- 
sumes no peculiar law. It is simply the law of demand 
and supply, which is acknowledged to be applicable to all 
commodities, and which, in the case of money as of most 
other things, is controlled, but not set aside, by the law of 
cost of production, since cost of production would have no 
effect on value if it could have none on supply. But, sec- 
ondly, there really is, in one respect, a closer connexion be- 
tween the value of money and its quantity, than between 
the values of other things and their quantity. The value 
of other things conforms to the changes in the cost of pro- 
duction, without requiring, as a condition, that there should 
be any actual alteration of the supply : the potential altera- 
tion is sufficient ; and if there even be an actual alteration, 
it is but a temporary one, except in so far as the altered 
value may make a difference in the demand, and so require 
an increase or diminution of supply, as a consequence, not 
a cause, of the alteration in value. Now this is also true of 
gold and silver, considered as articles of expenditure fur or- 
nament and luxury ; but it is not true of money. If the 
permanent cost of production of gold were reduced one- 
fourth, it might happen that there would not be more of it 
bought for plate, gilding, or jewellery, than before ; and if 
so, though the value would fall, the quantity extracted from 
the mines for these purposes, would be no greater than pre- 
viously. Not so with the portion used as money ; that por- 
tion could not fall in value one-fourth, unless actually i 11- 
creased one-fourth ; for, at prices one-fourth higher, one-fourth 
more money would be required to make the accustomed pur- 
chases ; and if this were not forthcoming, some of the com- 
modities would be without purchasers, and prices could not 



44 BOOK III. CHAPTER IX. §3. 

be kept up. Alterations, therefore, in the cost of production 
of the precious metals, do not act upon the value of money 
except just in proportion as they increase or diminish its 
quantity ; which cannot be said of any other commodity. 
It would therefore, I conceive, be an error, both scien- 
tifically and practically, to discard the proposition which 
asserts a connexion between the value of money and its 
quantity. 

It is evident, however, that the cost of production, in 
the long run, regulates the quantity ; and that every coun- 
try (temporary fluctuations excepted) will possess, and have 
in circulation, just that quantity of money, which will per- 
form all the exchanges required of it, consistently with main- 
taining a value conformable to its cost of production. The 
prices of things will, on the average, be such that money 
will exchange for its own cost in all other goods : and, pre- 
cisely because the quantity cannot be prevented from affect- 
ing the value, the quantity itself will (by a sort of self-acting 
machinery) bo kept at the amount consistent with that 
standard of prices — at the amount necessary for performing, 
at those prices, all the business required of it. 

" The quantity wanted will depend partly on the cost 
of producing gold, and partly on the rapidity of its circula- 
tion. The rapidity of circulation being given, it would de- 
pend on the cost of production : and the cost of production 
being given, the quantity of money would depend on the 
rapidity of its circulation." * After what has been already 
said, I hope that neither of these propositions stands in need 
of any further illustration. 

Money, then, like commodities in general, having a 
value dependent on, and proportional to, its cost of produc- 
tion ; the theory of money is, by the admission of this prin- 
ciple, stript of a great part of the mystery which apparently 

* From some printed, but not published, Lectures of Mr. Senior : in which 
the great differences in the business done by money, as well as in the rapidity 
of its circulation, in different states of society and civilization, are interestingly 
illustrated. 



VALUE OF MONEY. 



45 



surrounded it. We must not forget, however, that this 
doctrine only applies to the places in which the precious 
metals are actually produced ; and that we have yet to 
enquire whether the law of the dependence of value on cost 
of production applies to the exchange of things produced at 
distant places. But however this may be, our propositions 
with respect to value will require no other alteration, where 
money is an imported commodity, than that of substituting 
for the cost of its production, the cost of obtaining it in the 
country. Every foreign commodity is bought by giving for 
it some domestic production ; and the labour and capital 
which a foreign commodity costs to us, is the labour and 
capital expended in producing the quantity of our own 
goods which we give in exchange for it. What this quan- 
tity depends upon. — what determines the proportions of in- 
terchange between the productions of one country and those 
of another, — is indeed a question of somewhat greater com- 
plexity than those we have hitherto considered. But this at 
least is indisputable, that within the country itself the value 
of imported commodities is determined by the value, and 
consequently by the cost of production, of the equivalent 
given for them ; and money, where it is an imported com- 
modity, is subject to the same law. 



CHAPTER X. 

OF A DOUBLE STANDARD, AND SUBSIDIARY COINS. 

§ 1. Thottqh the qualities necessary to fit any com- 
modity for being used as money are rarely united in any 
considerable perfection, there are two commodities which 
possess them in an eminent, and nearly an equal degree ; 
the two precious metals, as they are called ; gold and silver. 
Some nations have accordingly attempted to compose their 
circulating medium of these two metals indiscriminately. 

There is an obvious convenience in making use of the 
more costly metal for larger payments, and the cheaper one 
for smaller ; and the only question relates to the mode in 
which this can best be done. The mode most frequently 
adopted has been to establish between the two metals a 
fixed proportion ; to decide, for example, that a gold coin 
called a sovereign should be equivalent to twenty of the 
silver coins called shillings : both the one and the other 
being called, in the ordinary money of account of the coun- 
try, by the same denomination, a pound : and it being left 
free to every one who has a pound to pay, either to pay it 
in the one metal or in the other. 

At the time when the valuation of the two metals rela- 
tively to each other, say twenty shillings to the sovereign, 
or twenty-one shillings to the guinea, was first made, the 
proportion probably corresponded, as nearly as it could be 
made to do, with the ordinary relative values of the two 
metals, grounded on their cost of production ; and if those 
natural or cost values always continued to bear the same 



DOUBLE STANDARD, AND SUBSIDIARY COINS. 47 

ratio to one another, the arrangement would be unobjection- 
able. This, however, is far from being the fact. Gold and 
silver, though the least variable in value of all commodities, 
are not invariable, and do not always vary simultaneously. 
Silver, for example, was lowered in permanent value more 
than gold, by the discovery of the American mines ; and 
those small variations of value which take place occasion- 
ally, do not affect both metals alike. Suppose such a varia- 
tion to take place : the value of the two metals relatively to 
one another no longer agreeing with their rated proportion, 
one or other of them will now be rated below its bullion 
value, and there will be a profit to be made by melting it. 

Suppose, for example, that gold rises in value relatively 
to silver, so that the quantity of gold in a sovereign is now 
worth more than the quantity of silver in twenty shillings. 
Two consequences will ensue. No debtor will any longer 
find it his interest to pay in gold. He will always pay in 
silver, because twenty shillings are a legal tender for a debt 
of one pound, and he can procure silver convertible into 
twenty shillings for less gold than that contained in a sov- 
ereign. The other consequence will be, that unless a sov- 
ereign can be sold for more than twenty shillings, all the 
sovereigns will be melted, since as bullion they will pur- 
chase a greater number of shillings than they exchange for 
as coin. The converse of all this would happen if silver, 
instead of gold, were the metal which had risen in compara- 
tive value. A sovereign would not now be worth so much 
as twenty shillings, and whoever had a pound to pay would 
prefer paying it by a sovereign ; while the silver coins 
would be collected for the purpose of being melted, and sold 
as bullion for gold at their real value, that is, above the 
legal valuation. The money of the community, therefore, 
would never really consist of both metals, but of the one 
only which, at the particular time, best suited the interest 
of debtors ; and the standard of the currency would be con- 
stantly liable to change from the one metal to the other, at 
a loss, on each change, of the expense of coinage on the 
metal which fell out of use. 



48 BOOK III. CHAPTER X. §2. 

It appears, therefore, that the value of money is liable to 
more frequent fluctuations when both metals are a legal 
tender at a fixed valuation, than when the exclusive stand- 
ard of the currency is either gold or silver. Instead of being 
only affected by variations in the cost of production of one 
metal, it is subject to derangement from those of two. The 
particular kind of variation to which a currency is rendered 
more liable by having two legal standards, is a fall of value, 
or what is commonly called a depreciation ; since practically 
that one of the two metals will always be the standard, of 
which the real has fallen below the rated value. If the tend- 
ency of the metals be to rise in value, all payments will be 
made in the one which has risen least ; and if to fall, then 
in that which has fallen most. 

§ 2. The plan of a double standard is still occasionally 
brought forward by here and there a writer or orator as a 
great improvement in currency. It is probable that, with 
most of its adherents, its chief merit is its tendency to a sort 
of depreciation, there being at all times abundance of sup- 
porters for any mode, either open or covert, of lowering the 
standard. Some, however, are influenced by an exaggerated 
estimate of an advantage which to a certain extent is real, 
that of being able to have recourse, for replenishing the cir- 
culation, to the united stock of gold and silver in the com- 
mercial world, instead of being confined to one of them, 
which, from accidental absorption, may not be obtainable 
with sufficient rapidity. The advantage without the disad- 
vantages of a double standard, seems to be best obtained by 
those nations with whom one only of the two metals is a 
legal tender, but the other also is coined, and allowed to 
pass for whatever value the market assigns to it. 

When this plan is adopted, it is naturally the more costly 
metal which is left to be bought and sold as an article of 
commerce. But nations which, like England, adopt the 
more costly of the two as their standard, resort to a different 
expedient for retaining them both in circulation, namely, to 



DOUBLE STANDARD, AND SUBSIDIARY COINS. 49 

make silver a legal tender, but only for small payments. In 
England, no one can be compelled to receive silver in pay- 
ment for a larger amount than forty shillings. With this 
regulation there is necessarily combined another, namely, 
that silver coin should be rated, in comparison with gold, 
somewhat above its intrinsic value ; that there should not 
be, in twenty shillings, as much silver as is worth a sover- 
eign : for if there were, a very slight turn of the market in 
its favour would make it worth more than a sovereign, and 
it would be profitable to melt the silver coin. The over- 
valuation of the silver coin creates an inducement to buy 
silver and send it to the mint to be coined, since it is given 
back at a higher value than properly belongs to it : this, 
however, has been guarded against, by limiting the quantity 
of the silver coinage, which is not left, like that of gold, to 
the discretion of individuals, but is determined by the gov- 
ernment, and restricted to the amount supposed to be re- 
quired for small payments. The only precaution necessary 
is, not to put so high a valuation upon the silver, as to hold 
out a strong temptation to private coining. 



4£ 



CHAPTER XL 

OF CREDIT, AS A SUBSTITUTE FOR MONET. 

§ 1. The functions of credit have been a subject of as 
much misunderstanding and as much confusion of ideas, as 
any single topic in Political Economy. This is not owing 
to any peculiar difficulty in the theory of the subject, but to 
the complex nature of some of the mercantile phenomena 
arising from the forms in which credit clothes itself; by 
which attention is diverted from the properties of credit in 
general, to the peculiarities of its particular forms. 

As a specimen of the confused notions entertained re- 
specting the nature of credit, we may advert to the exag- 
gerated language so often used respecting its national 
importance. Credit has a great, but not, as many people 
seem to suppose, a magical power ; it cannot make some- 
thing out of nothing. How often is an extension of credif 
talked of as equivalent to a creation of capital, or as if credit 
actually were capital. It seems strange that there should 
be any need to point out, that credit being only permission 
to use the capital of another person, the means. of produc- 
tion cannot be increased by it, but only transferred. If the 
borrower's means of production and of employing labour are 
increased by the credit given him, the lender's are as much 
diminished. The same sum cannot be used as capital both 
by the owner and also by the person to whom it is ]ent : it 
cannot supply its entire value in wages, tools, and materials, 
to two sets of labourers at once. It is true that the capital 
which A has borrowed from B, and makes use of in his 



CREDIT AS A SUBSTITUTE FOR MONEY. 51 

business, still forms a part of the wealth of B for other pur- 
poses ; he can enter into arrangements in reliance on it, and 
can borrow, when needful, an equivalent sum on the secu- 
rity of it ; so that to a superficial eye it might seem as if both 
B and A had the use of it at once. But the smallest consid- 
eration will show that when B has parted with his capital to 
A, the use of it as capital rests with A alone, and that B 
has no other service from it than in so far as his ultimate 
claim upon it serves him to obtain the use of another capital 
from a third person C. All capital (not his own) of which 
any person has really the use, is, and must be, so much sub- 
tracted from the capital of some one else. 

§ 2. But though credit is never anything more than a 
transfer of capital from hand to hand, it is generally, and 
naturally, a transfer to hands more competent to employ the 
capital efficiently in production. If there were no such 
thing as credit, or if, from general insecurity and want of 
confidence, it were scantily practised, many persons who 
possess more or less of capital, but who from their occupa- 
tions, or for want of the necessary skill and knowledge, can- 
not personally superintend its employment, would derive no 
benefit from it : their funds would either lie idle, or would 
be, perhaps, wasted and annihilated in unskilful attempts to 
make them yield a profit. All this capital is now lent at 
interest, and made available for production. Capital thus 
circumstanced forms a large portion of the productive re- 
sources of any commercial country ; and is naturally attract- 
ed to those producers or traders who, being in the greatest 
business, have the means of employing it to most advantage ; 
because such are both the most desirous to obtain it, and 
able to give the best security. Although, therefore, the 
productive funds of the country are not increased by credit, 
they are called into a more complete state of productive 
activity. As the confidence on which credit is grounded 
extends itself, means are developed by which even the 
smallest portions of capital, the sums which each person 



52 BOOK III. CHAPTER XI. §2. 

keeps by him to meet contingencies, are made available fot 
productive uses. The principal instruments for this purpose 
are banks of deposit. Where these do not exist, a prudent 
person must keep a sufficient sum unemployed in his own 
possession, to meet every demand which he has even a slight 
reason for thinking himself liable to. When the practice, 
however, has grown up of keeping this reserve not in his 
own custody but with a banker, many small sums, previous- 
ly lying idle, become aggregated in the banker's hands ; 
and the banker, being taught by experience what propor- 
tion of the amount is likely to be wanted in a given time, 
and knowing that if one depositor happens to require more 
than the average, another will require less, is able to lend 
the remainder, that is, the far greater part, to producers and 
dealers : thereby adding the amount, not indeed to the cap- 
ital in existence, but to that in employment, and making a 
corresponding addition to the aggregate production of the 
community. 

While credit is thus indispensable for rendering the 
whole capital of the country productive, it is also a means 
by which the industrial talent of the country is turned to 
better account for purposes of production. Many a person 
who has either no capital of his own, or very little, but who 
has qualifications for business which are known and appre- 
ciated by some possessors of capital, is enabled to obtain 
either advances in money, or more frequently goods on 
credit, by which his industrial capacities are made instru- 
mental to the increase of the public wealth ; and this benefit 
will be reaped far more largely, whenever, through better 
laws and better education, the community shall have made 
such progress in integrity, that personal character can be 
accepted as a sufficient guarantee not only against dishon- 
estly appropriating, but against dishonestly risking, what 
belongs to another. 

Such are, in the most general point of view, the uses of 
credit to the productive resources of the world. But these 
considerations only apply to the credit given to the indus- 



CREDIT AS A SUBSTITUTE FOR MONEY. 53 

trious classes — to producers and dealers. Credit given by 
dealers to unproductive consumers is never an addition, but 
always a detriment, to the sources of public wealth. It 
makes over in temporary use, not the capital of the unpro- 
ductive classes to the productive, but that of the productive 
to the unproductive. If A, a dealer, supplies goods to B, a 
land-owner or annuitant, to be paid for at the end of five 
years, as much of the capital of A as is equal to the value 
of these goods, remains for five years unproductive. During 
such a period, if payment had been made at once, the sum 
might have been several times expended and replaced, and 
goods to the amount might have been several times pro- 
duced, consumed, and reproduced : consequently B's with- 
holding 100Z. for five years, even if he pays at last, has cost 
to the labouring classes of the community during that period 
an absolute loss of probably several times that amount. A, 
individually, is compensated, by putting a higher price 
upon his goods, which is ultimately paid by B : but there is 
no compensation made to the labouring classes, the chief 
sufferers by every diversion of capital, whether permanent- 
ly or temporarily, to unproductive uses. The country has 
had 1001. less of capital during those five years, B having 
taken that amount from A's capital, and spent it unpro- 
ductively, in anticipation of his own means, and having only 
after five years set apart a sum from his income and con- 
verted it into capital for the purpose of indemnifying A. 

§ 3. Thus far of the general function of Credit in pro- 
duction. It is not a productive power in itself, though, 
without it, the productive powers already existing could not 
be brought into complete employment. But a more intri- 
cate portion of the theory of Credit is its influence on 
prices ; the chief cause of most of the mercantile phenomena 
which perplex observers. In a state of commerce in which 
much credit is habitually given, general prices at any mo- 
ment depend much more upon the state of credit than upon 
the quantity of money. For credit, though it is not pro- 



54 BOOK III. CHAPTER XI. §8. 

ductive power, is purchasing power ; and a person who, 
having credit, avails himself of it in the purchase of goods, 
creates just as much demand for the goods, and tends quite 
as much to raise their price, as if he made an equal amount 
of purchases with ready money. 

The credit which we are now called upon to consider, as a 
distinct purchasing power, independent of money, is of course 
not credit in its simplest form, that of money lent by one per- 
son to another, and paid directly into his hands ; for when the 
borrower expends this in purchases, he makes the purchases 
with money, not credit, and exerts no purchasing power over 
and above that conferred by the money. The forms of credit 
which create purchasing power, are those in which no money 
passes at the time, and very often none passes at all, the trans- 
action being included with a mass of other transactions in 
an account, and nothing paid but a balance. This takes 
place in a variety of ways, which we shall proceed to exam- 
ine, beginning, as is our custom, with the simplest. 

First : Suppose A and B to be two dealers, who have trans- 
actions with each other both as buyers and as sellers. A buys 
from B on credit. B does the like with respect to A. At 
the end of the year, the sum of A's debts to B is set against 
the sum of B's debts to A, and it is ascertained to which side 
a balance is due. This balance, which may be less than the 
amount of many of the transactions singly, and is necessari- 
ly less than the sum of the transactions, is all that is paid in 
money ; and perhaps even this is not paid, but carried over in 
an account current to the next year. A single payment of a 
hundred pounds may in this manner suffice to liquidate a long 
series of transactions, some of them to the value of thousands. 

But secondly : The debts of A to B may be paid without 
the intervention of money, even though there be no recipro- 
cal debts of B to A. A may satisfy B by making over to 
him a debt due to himself from a third person, C. This is 
conveniently done by means of a written instrument, called 
a bill of exchange, which is, in fact, a transferable order by 
a creditor upon his debtor, and when accepted by the debtor, 



CREDIT AS A SUBSTITUTE FOR -MONEY. 55 

that is, authenticated by his signature, becomes an acknowl- 
edgment of debt. 

§ 4. Bills of exchange were first introduced to save 
the expense and risk of transporting the precious metals 
from place to place. " Let it be supposed," says Mr. Henry 
Thornton,* " that there are in London ten manufacturers 
who sell their article to ten shopkeepers in York, by whom 
it is retailed ; and that there are in York ten manufacturers 
of another commodity, who sell it to ten shopkeepers in 
London. There would be no occasion for the ten shopkeepers 
in London to send yearly to York guineas for the payment 
of the York manufacturers, and for the ten York shopkeep- 
ers to send yearly as many guineas to London. It would 
only be necessary for the York manufacturers to receive 
from each of the shopkeepers at their own door the money 
in question, giving in return letters which should acknowl- 
edge the receipt of it ; and which should also direct the 
money, lying ready in the hands of their debtors in London, 
to be paid to the London manufacturers, so as to cancel the 
debt in London in the same manner as that at York. The 
expense and the risk of all transmission of money would 
thus be saved. Letters ordering the transfer of the debt 
are termed, in the language of the present day, bills of ex- 
change. They are bills by which the debt of one person is 
exchanged for the debt of another ; and the debt, perhaps, 
which is due in one place, for the debt due in another." 

Bills of exchange having been found convenient as means 
of paying debts at distant places without the expense of 
transporting the precious metals, their use was afterwards 
greatly extended from another motive. It is usual in every 
trade to give a certain length of credit for goods bought : 
three months, six months, a year, even two years, accord- 

* Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 
p. 24. This work, published in 1802, is even now the clearest exposition that I 
am acquainted with, in the English language, of the modes in which credit i» 
given and taken in a mercantile community. 



56 BOOK III. CHAPTER XI. §4. 

ing to the convenience or custom of the particular trade. 
A dealer who has sold goods, for which he is to be paid in 
six months, but who desires to receive payment sooner, 
draws a bill on his debtor payable in six months, and gets 
the bill discounted by a banker or other money-lender, that 
is, transfers the bill to him, receiving the amount, minus 
interest for the time it has still to run. It has become one 
of the chief functions of bills of exchange to serve as a means 
by which a debt due from one person can thus be made 
available for obtaining credit from another. The conve- 
nience of the expedient has led to the frequent creation of 
bills of exchange not grounded on any debt previously due 
to the drawer of the bill by the person on whom it is drawn. 
These are called accommodation bills ; and sometimes, with 
a tinge of disapprobation, fictitious bills. Their nature is 
so clearly stated, and with such judicious remarks, by the 
author whom I have just quoted, that I shall transcribe the 
entire passage.* 

" A, being in want of 100Z., requests B to accept a note 
or bill drawn at two months, which B, therefore, on the 
face of it, is bound to pay ; it is understood, however, that 
A will take care either to discharge the bill himself, or to 
furnish B with the means of paying it. A obtains ready 
money for the bill on the joint credit of the two parties. 
A fulfils his promise of paying it when due, and thus con- 
cludes the transaction. This service rendered by B to A is, 
however, not unlikely to be requited, at a more or less dis- 
tant period, by a similar acceptance of a bill on A, drawn 
and discounted for B's convenience. 

" Let us now compare such a bill with a real bill. Let 
us consider in what points they differ, or seem to differ ; 
and in what they agree. 

" They agree, inasmuch as each is a discountable article ; 
each has also been created for the purpose of being dis- 
counted ; and each is, perhaps, discounted in fact. Each, 
therefore, serves equally to supply means of speculation to 

* Pp. 29—33. 



CREDIT AS A SUBSTITUTE FOR MONEY. 57 

the merchant. So far, moreover, as bills and notes consti- 
tute what is called the circulating medium, or paper cur- 
rency of the country, and prevent the use of guineas, the 
fictitious and the real bill are upon an equality ; and if the 
price of commodities be raised in proportion to the quantity 
of paper currency, the one contributes to that rise exactly 
in the same manner as the other. 

" Before we come to the points in which they differ, let 
us advert to one point in which they are commonly sup- 
posed to be unlike ; but in which they cannot be said always 
or necessarily to differ. 

" Real notes (it is sometimes said) represent actual 
property. There are actual goods in existence, which are 
the counterpart to every real note. Notes which are not 
drawn in consequence of a sale of goods, are a species of 
false wealth, by which a nation is deceived. These supply 
only an imaginary capital ; the others indicate one that is 
real. 

" In answer to this statement it may be observed, first, 
that the notes given in consequence of a real sale of goods 
cannot be considered as on that account certainly represent- 
ing any actual property. Suppose that A sells 1001. worth 
of goods to B at six months credit, and takes a bill at six 
months for it ; and that B, within a month after, sells the 
same goods, at a like credit, to C, taking a like bill ; and 
again, that C, after another month, sells them to D, taking 
a like bill, and so on. There may then, at the end of six 
months, be six bills of 1001. each, existing at the same time ; 
and every one of these may possibly have been discounted. 
Of all these bills, then, only one represents any actual prop- 
erty. 

" In order to justify the supposition that a real bill (as 
it is called) represents actual property, there ought to be 
some power in the bill-holder to prevent the property which 
the bill represents, from being turned to other purposes than 
that of paying the bill in question. No such power exists ; 
neither the man who holds the real bill, nor the man who 



58 BOOK III. CHAPTER XI. §4. 

discounts it, has any property in the specific goods for which 
it was given : he as much trusts to the general ability to pay 
of the giver of the bill, as the holder of any fictitious bill 
does. The fictitious bill may, in many cases, be a bill given 
by a person having a large and known capital, a part of 
which the fictitious bill may be said in that case to repre- 
sent. The supposition that real bills represent property, 
and that fictitious bills do not, seems, therefore, to be one 
by which more than justice is done to one of these species 
of bills, and something less than justice to the other. 

" We come next to some points in which they differ. 

" First, the fictitious note, or note of accommodation, is 
liable to the objection that it professes to be what it is not. 
This objection, however, lies only against those fictitious 
bills which are passed as real. In many cases, it is suffi- 
ciently obvious what they are. Secondly, the fictitious bill 
is, in general, less likely to be punctually paid than the real 
one. There is a general presumption, that the dealer in ficti- 
tious bills is a man who is a more adventurous speculator 
than he who carefully abstains from them. It follows, 
thirdly, that fictitious bills, besides being less safe, are less 
subject to limitation as to their quantity. The extent of a 
man's actual sales forms some limit to the amount of his 
real notes ; and as it is highly desirable in commerce that 
credit should be, dealt out to all persons in some sort of 
regular and due proportion, the measure of a man's actual 
sales, certified by the appearance of his bills drawn in vir- 
tue of those sales, is some rule in the case, though a very 
imperfect one in many respects. 

" A fictitious bill, or bill of accommodation, is evidently, 
in substance, the same as any common promissory note ; 
and even better in this respect, that there is but one security 
to the promissory note, whereas in the case of the bill of 
accommodation, there are two. So much jealousy subsists 
lest traders should push their means of raising money too 
far, that paper, the same in its general nature with that 
which is given, being the only paper which can be given, 



CREDIT AS A SUBSTITUTE FOR MONEY. 59 

by men out of business, is deemed somewhat discreditable 
when coming from a merchant. And because such paper, 
when in the merchant's hand, necessarily imitates the paper 
which passes on the occasion of a sale of goods, the epithet 
fictitious has been cast upon it ; an epithet which has seemed 
to countenance the confused and mistaken notion, that there 
is something altogether false and delusive in the nature of 
a certain part both of the paper and of the apparent wealth 
of the country." 

A bill of exchange, when merely discounted, and kept 
in the portfolio of the discounter until it falls due, does not 
perform the functions or supply the place of money, but is 
itself bought and sold for money. It is no more currency 
than the public funds, or any other securities. But when 
a bill drawn upon one person is paid to another (or even to 
the same person) in discharge of a debt or a pecuniary claim, 
it does something for which, if the bill did not exist, money 
would be required : it perfoms the functions of currency. 
This is a use to which bills of exchange are often applied. 
" They not only," continues Mr. Thornton,* " spare the use 
of ready money ; they also occupy its place in many cases. 
Let us imagine a farmer in the country to discharge a debt 
of 101. to his neighbouring grocer, by giving him a bill for 
that sum, drawn on his cornfactor in London for grain sold 
in the metropolis ; and the grocer to transmit the bill, he 
having previously indorsed it, to a neighbouring sugar-baker, 
in discharge of a like debt ; and the sugar-baker to send it, 
when again indorsed, to a West India merchant in an out- 
port, and the West India merchant to deliver it to his coun- 
try banker, who also indorses it, and sends it into further 
circulation. The bill in this case will have effected five 
payments, exactly as if it were a 101. note payable to bearei 
on demand. A multitude of bills pass between trader and 
trader in the country, in the manner which has been de- 
scribed ; and they evidently form, in the strictest sense, a 
part of the circulating medium of the kingdom." ^^^ 

* P. 40. 



60 BOOK III. CHAPTER XI. §6. 

Many bills, both domestic and foreign, are at last pre- 
sented for payment quite covered with indorsements, each 
of which represents either a fresh discounting, or a pecun- 
iary transaction in which the bill has performed the func- 
tions of money. Within the present generation, the circu- 
lating medium of Lancashire for sums above five pounds, 
was almost entirely composed of such bills. 

§ 5. A third form in which credit is employed as a 
substitute for currency, is that of promissory notes. A bill 
drawn upon any one and accepted by him, and a note of 
hand by him promising to pay the same sum, are, as far as 
he is concerned, exactly equivalent, except that the former 
commonly bears interest and the latter generally does not ; 
and that the former is commonly payable only after a cer- 
tain lapse of time, and the latter payable at sight. But it 
is chiefly in the latter form that it has become, in commer- 
cial countries, an express occupation to issue such substi- 
tutes for money. Dealers in money (as lenders by profes- 
sion are improperly called) desire, like other dealers, to 
stretch their operations beyond what can be carried on by 
their own means : they wish to lend, not their capital 
merely, but their credit, and not only such portion of their 
credit as consists of funds actually deposited with them, but 
their power of obtaining credit from the public generally, 
so far as they think they can safely employ it. This is done 
in a very convenient manner by lending their own promis- 
sory notes payable to bearer on demand : the borrower be- 
ing willing to accept these as so much money, because the 
credit of the lender makes other people willingly receive them 
on the same footing, in purchases or other payments. These 
notes, therefore, perform all the functions of currency, and 
render an equivalent amount of money which was previously 
in circulation, unnecessary. As, however, being payable 
on demand, they may be at any time returned on the 
issuer, and money demanded for them, he must, on pain of 
bankruptcy, keep by him as much money as will enable 



CREDIT AS A SUBSTITUTE FOR MONEY. 61 

him to meet any claims of that sort which can be expected 
to occur within the time necessary for providing himself 
with more : and prudence also requires that he should not 
attempt to issue notes beyond the amount which experience 
6hows can remain in circulation without being presented for 
payment. 

The convenience of this mode of (as it were) coining 
credit, having once been discovered, governments have 
availed themselves of the same expedient, and have issued 
their own promissory notes in payment of their expenses ; 
a resource the more useful, because it is the only mode in 
which they are able to borrow money without paying in- 
terest, their promises to pay on demand being, in the esti- 
mation of the holders, equivalent to money in hand. The 
practical differences between such government notes and 
the issues of private bankers, and the further diversities of 
which this class of substitutes for money are susceptible, 
will be considered presently. 

§ 6. A fourth mode of making credit answer the pur- 
poses of money, by which, when carried far enough, money 
may be very completely superseded, consists in making 
payments by cheques. The custom of keeping the spare 
cash reserved for immediate use or against contingent de- 
mands, in the hands of a banker, and making all payments, 
except small ones, by orders on bankers, is in this country 
spreading to a continually larger portion of the public. If 
the person making the payment, and the person receiving 
it, keep their money with the same banker, the payment 
takes place without any intervention of money, by the mere 
transfer of its amount in the banker's books from the credit 
of the payer to that of the receiver. If all persons in Lon- 
don kept their cash at the same banker's, and made all their 
payments by means of cheques, no money would be required 
or used for any transactions beginning and terminating in 
London. This ideal limit is almost attained in fact, so fai 
as regards transactions between dealers. It is chiefly in the 



62 BOOK III. CHAPTER XL §6. 

retail transactions between dealers and consumers, and in 
the payment of wages, that money or bank notes now pass, 
and then only when the amounts are small. In London, 
even shopkeepers of any amount of capital or extent of 
business have generally an account with a banker ; which, 
besides the safety and convenience of the practice, is to their 
advantage in another respect, by giving them an understood 
claim to have their bills discounted in cases when they could 
not otherwise expect it. As for the merchants and larger 
dealers, they habitually make all payments in the course 
of their business by cheques. They do not, however, all 
deal with the same banker, and when A gives a cheque to 
B, B usually pays it not into the same but into some other 
bank. But the convenience of business has given birth to 
an arrangement which makes all the banking houses of the 
City of London, for certain purposes, virtually one establish- 
ment. A banker does not send the cheques which are paid 
into his banking house, to the banks on which they are 
drawn, and demand money for them. There is a building 
called the Clearing-house, to which every City banker sends, 
each afternoon, all the cheques on other bankers which he 
has received during the day, and they are there exchanged 
for the cheques on him which have come into the hands of 
other bankers, the balances only being paid in money ; or 
even these not in money, but in cheques on the Bank of 
England. By this contrivance, all the business transactions 
of the City of London during that day, amounting often to 
millions of pounds, and a vast amount besides of country 
transactions, represented by bills which country bankers 
have drawn upon their London correspondents, are liqui- 
dated by payments not exceeding on the average 200,0007.* 

* According to Mr. Tooke (Enquiry into the Currency Principle, p. 27) the 
adjustments at the clearing house " in the year 1839 amounted to 954,401,600?., 
making an average amount of payments of upwards of 3,000,000/. of bills of 
exchange and cheques daily effected through the medium of little more than 
200,0002. of bank notes." At present a very much greater amount of transac- 
tions is daily liquidated, without bank notes at all, cheques on the bank of Eng- 
land supplying their place. 



CREDIT AS A SUBSTITUTE FOR MONEY. 63 

By means of the various instruments of credit which 
have now been explained, the immense business of a coun- 
try like Great Britain is transacted with an amount of the 
precious metals surprisingly small ; many times smaller, in 
proportion to the pecuniary value of the commodities bought 
and sold, than is found necessary in France, or any other 
country in which, the habit and the disposition to give 
credit not being so generally diffused, these " economizing 
expedients," as they have been called, are not practised to 
the same extent. What becomes of the money thus super- 
seded in its functions, and by what process it is made to 
disappear from circulation, are questions the discussion of 
which must be for a short time postponed. 



CHAPTEK XII. 

INFLUENCE OF CREDIT ON PRICES. 

§ 1. Having now formed a general idea of the modes 
in which credit is made available as a substitute for money, 
we have to consider in what manner the use of these substi- 
tutes affects the value of money, or, what is equivalent, the 
prices of commodities. It is hardly necessary to say that 
the permanent value of money — the natural and average 
prices of commodities — are not in question here. These 
are determined by the cost of producing or of obtaining the 
precious metals. An ounce of gold or silver will in the long 
run exchange for as much of every other commodity, as can 
be produced or imported at the same cost with itself. And 
an order, or note of hand, or bill payable at sight, for an 
ounce of gold, while the credit of the giver is unimpaired, 
is worth neither more nor less than the gold itself. 

It is not, however, with ultimate or average, but with 
immediate and temporary prices, that we are now concerned. 
These, as we have seen, may deviate very widely from the 
standard of cost of production. Among other causes of 
fluctuation, one we have found to be, the quantity of money 
in circulation. Other things being the same, an increase 
of the money in circulation raises prices, a diminution low- 
ers them. If more money is thrown into circulation than 
the quantity which can circulate at a value conformable to 
its cost of production, the value of money, so long as the 
excess lasts, will remain below the standard of cost of pro- 



INFLUENCE OF CREDIT ON PRICES. 65 

duction, and general prices will be sustained above the 
natural rate. 

But we have now found that there other things, such as 
bank notes, bills of exchange, and cheques, which circulate 
as money, and perform all the functions of it : and the ques- 
tion arises, Do these various substitutes operate on prices 
in the same manner as money itself? Does an increase in 
the quantity of transferable paper tend to raise prices, in 
the same manner and degree as an increase in the quantity 
of money ? There has been no small amount of discussion 
on this point among writers on currency, without any result 
so conclusive as to have yet obtained general assent. 

I apprehend that bank notes, bills, or cheques, as such, 
do not act on prices at all. What does act on prices is 
Credit, in whatever shape given, and whether it gives rise 
to any transferable instruments capable of passing into cir- 
culation, or not. 

I proceed to explain and substantiate this opinion. 

§ 2. Money acts upon prices in no other way than by 
being tendered in exchange for commodities. The demand 
which influences the prices of commodities consists of the 
money offered for them. But the money offered, is not the 
same thing with the money possessed. It is sometimes less, 
sometimes very much more. In the long run indeed, the 
money which people lay out will be neither more nor less 
than the money which they have to lay out : but this is far 
from being the case at any given time. Sometimes they 
keep money by them for fear of an emergency, or in expec- 
tation of a more advantageous opportunity of expending it. 
In that case the money is said not to be in circulation : in 
plainer language, it is not offered, nor about to be offered, 
for commodities. Money not in circulation has no effect 
on prices. The converse, however, is a much commoner 
case ; people make purchases with money not in their pos- 
session. An article, for instance, which is paid for by a 
cheque on a banker, is bought with money which not only 
44 



gg BOOK III. CHAPTER XII. §2. 

is not in the payer's possession, but generally not even in 
the banker's, having been lent by him (all but the usual 
reserve) to other persons. "We just now made the imagi- 
nary supposition that all persons dealt with a bank, and all 
with the same bank, payments being universally made by 
cheques. In this ideal case, there would be no money any- 
where except in the hands of the banker ; who might then 
6afely p,art with all of it, by selling it as bullion, or lending 
it, to be sent out of the country in exchange for goods or 
foreign securities. But though there then would be no 
money in possession, or ultimately perhaps even in exist- 
ence, money would be offered, and commodities bought 
with it, just as at present. People would continue to reckon 
their incomes and their capitals in money, and to make their 
usual purchases with orders for the receipt of a thing which 
would have literally ceased to exist. There would be in all 
this nothing to complain of, so long as the money, in disap- 
pearing, left an equivalent value in other things, applicable 
when required to the reimbursement of those to whom the 
money originally belonged. 

In the case however of payment by cheques, the pur- 
chases are at any rate made, though not with the money 
in the buyer's possession, yet with money to which he has 
a right. But he may make purchases with money which 
he only expects to have, or even only pretends to expect. 
He may obtain goods in return for his acceptances payable 
at a future time ; or on his note of hand ; or on a simple 
book credit, that is, on a mere promise to pay. All these 
purchases have exactly the same effect on price, as if they 
were made with ready money. The amount of purchasing 
power which a person can exercise is composed of all the 
money in his possession or due to him, and of all his credit. 
For exercising the whole of this power he finds a sufficient 
motive only under peculiar circumstances ; but he always 
possesses it ; and the portion of it which he at any time 
does exercise, is the measure of the effect which he produces 
on price. 



INFLUENCE OF CREDIT ON PRICES. 67 

Suppose that, in the expectation that some commodity 
will rise in price, he determines, not only to invest in it all 
his ready money, but to take up on credit, from the produ- 
cers or importers, as much of it as their opinion of his re- 
sources will enable him to obtain. Every one must see that 
by thus acting he produces a greater effect on price, than 
if he limited his purchases to the money he has actually in 
hand. He creates a demand for the article to the full 
amount of his money and credit taken together, and raises 
the price proportionally to both. And this effect is pro- 
duced, though none of the written instruments called sub- 
stitutes for currency may be called into existence ; though 
the transaction may give rise to no bill of exchange, nor to 
the issue of a single bank note. The buyer, instead of tak- 
ing a mere book credit, might have given a bill for the 
amount ; or might have paid for the goods with bank notes 
borrowed for that purpose from a banker, thus making the 
purchase not on his own credit with the seller, but on the 
banker's credit with the seller, and his own with the banker. 
Had he done so, he would have produced as great an effect 
on price as by a simple purchase to the same amount on a 
book credit, but no greater effect. The credit itself, not 
the form and mode in which it is given, is the operating 
cause. 

§ 3. The inclination of the mercantile public to in- 
crease their demand for commodities by making use of all 
or much of their credit as a purchasing power, depends on 
their expectation of profit. "When there is a general im- 
pression that the price of some commodity is likely to rise, 
from an extra demand, a short crop, obstructions to impor- 
tation, or any other cause, there is a disposition among 
dealers to increase their stocks, in order to profit by the ex- 
pected rise. This disposition tends in itself to produce the 
effect which it looks forward to, a rise of price : and if the 
rise is considerable and progressive, other speculators are 
attracted, who, so long as the price has not begun to fall, 



68 BOOK III. CHAPTER XII. §3. 

are willing to believe that it will continue rising. These, 
by further purchases, produce a further advance : and thus 
a rise of price for which there were originally some rational 
grounds, is often heightened by merely speculative pur- 
chases, until it greatly exceeds what the original grounds 
will justify. After a time this begins to be perceived ; the 
price ceases to rise, and the holders, thinking it time to 
realize their gains, are anxious to sell. Then the price be- 
gins to decline : the holders rush into the market to avoid 
a still greater loss, and, few being willing to buy in a fall- 
ing market, the price falls much more suddenly than it rose. 
Those who have bought at a higher price than reasonable 
calculation justified, and who have been overtaken by the 
revulsion before they had realized, are losers in proportion 
to the greatness of the fall, and to the quantity of the com- 
modity which they hold, or have bound themselves to pay 
for. 

~Now all these effects might take place in a community 
to which credit was unknown : the prices of some com- 
modities might rise from speculation, to an extravagant 
height, and then fall rapidly back. But if there were no 
such thing as credit, this could hardly happen with respect 
to commodities generally. If all purchases were made with 
ready money, the payment of increased prices for some 
articles would draw an unusual proportion of the money of 
the community into the markets for those articles, and must 
therefore draw it away from some other class of commodi- 
ties, and thus lower their prices. The vacuum might, it is 
true, be partly filled up by increased rapidity of circula- 
tion ; and in this manner the money of the community is 
virtually increased in a time of speculative activity, because 
people keep little of it by them, but hasten to lay it out in 
some tempting adventure as soon as possible after they re- 
ceive it. This resource, however, is limited : on the whole, 
people cannot, while the quantity of money remains the 
same, lay out much more of it in some things, without lay- 
ing out less in others. But what they cannot do by ready 



INFLUENCE OF CREDIT ON PRICES. 69 

money, they can do by an extension of credit. When peo- 
ple go into the market and purchase with money which they 
hope to receive hereafter, they are drawing upon an un- 
limited, not a limited fund. Speculation, thus supported, 
may be going on in any number of commodities, without 
disturbing the regular course of business in others. It 
might even be going on in all commodities at once. "We 
could imagine that in an epidemic fit of the passion of 
gambling, all dealers, instead of giving only their accus- 
tomed orders to the manufacturers or growers of their com- 
modity, commenced buying up all of it which they could 
procure, as far as their capital and credit would go. All 
prices would rise enormously, even if there were no increase 
of money, and no paper credit, but a mere extension of pur- 
chases on book credits. After a time those who had bought 
would wish to sell, and prices would collapse. 

This is the ideal extreme case of what is called a com- 
mercial crisis. There is said to be a commercial crisis, when 
a great number of merchants and traders at once, either 
have, or apprehend that they shall have, a difficulty in 
meeting their engagements. The most usual cause of this 
general embarrassment, is the recoil of prices after they 
have been raised by a spirit of speculation, intense in degree, 
and extending to many commodities. Some accident, which 
excites expectations of rising prices, such as the opening of 
a new foreign market, or simultaneous indications of a short 
supply of several great articles of commerce, sets specula- 
tion at work in several leading departments at once. The 
prices rise, and the holders realize, or appear to have the 
power of realizing, great gains. In certain states of the 
public mind, such examples of rapid increase of fortune call 
forth numerous imitators, and speculation not only goes 
much beyond what is justified by the original grounds for 
expecting rise of price, but extends itself to articles in which 
there never was any such ground : these, however, rise like 
the rest as soon as speculation sets in. At periods of this 
kind, a great extension of credit takes place. Not only do 



70 BOOK III. CHAPTER XII. §3. 

all whom the contagion reaches, employ their credit much 
more freely than usual ; but they really have more credit, 
because they seem to be making unusual gains, and because 
a generally reckless and adventurous feeling prevails, which 
disposes people to give as well as take credit more largely 
than at other times, and give it to persons not entitled to 
it. In this manner, in the celebrated speculative year 1825, 
and at various other periods during the present century, the 
prices of many of the principal articles of commerce rose 
greatly, without any fall in others, so that general prices 
might, without incorrectness, be said to have risen. When, 
after such a rise, the reaction comes, and prices begin to 
fall, though at first perhaps only through the desire of the 
holders to realize, speculative purchases cease : but were 
this all, prices would only fall to the level from which they 
rose, or to that which is justified by the state of the con- 
sumption and of the supply. They fall, however, much 
lower ; for as, when prices were rising, and everybody ap- 
parently making a fortune, it was easy to obtain almost any 
amount of credit, so now, when everybody seems to be 
losing, and many fail entirely, it is with difficulty that firms 
of known solidity can obtain even the credit to which they 
are accustomed, and which it is the greatest inconvenience 
to them to be without ; because all dealers have engage- 
ments to fulfil, and nobody feeling sure that the portion of 
his means which he has entrusted to others will be available 
in time, no one likes to part with ready money, or to post- 
pone his claim to it. To these rational considerations there 
is superadded, in extreme cases, a panic as unreasoning as 
the previous over-confidence ; money is borrowed for short 
periods at almost any rate of interest, and sales of goods for 
immediate payment are made at almost any sacrifice. Thus 
general prices, during a commercial revulsion, fall as much 
below the usual level, as during the previous period of 
speculation they have risen above it : the fall, as well as 
the rise, originating not in anything affecting money, but 
in the state of credit ; an unusually extended employment 



INFLUENCE OF CREDIT ON PRICES. 7J 

of credit during the earlier period, followed by a great di- 
minution, never amounting however to an entire cessation 
of it, in the latter. 

It is not, however, universally true that the contraction 
of credit, characteristic of a commercial crisis, must have 
been preceded by an extraordinary and irrational extension 
of it. There are other causes ; and one of the most recent 
crises, that of 1847, is an instance, having been preceded by 
no particular extension of credit, and by no speculations ; 
except those in railway shares, which, though in many cases 
extravagant enough, yet being carried on mostly with that 
portion of means which the speculators could afford to lose, 
were not calculated to produce the wide-spread ruin which 
arises from vicissitudes of price in the commodities in which 
men habitually deal, and in which the bulk of their capital 
is invested. The crises of 1847 belonged to another class 
of mercantile phenomena. There occasionally happens a 
concurrence of circumstances tending to withdraw from the 
loan market a considerable portion of the capital which 
usually supplies it. These circumstances, in the present 
case, were great foreign payments, (occasioned by a high 
price of cotton and an unprecedented importation of food,) 
together with the continual demands on the circulating cap- 
ital of the country by railway calls and the loan transactions 
of railway companies, for the purpose of being converted 
into fixed capital and made unavailable for future lending. 
These various demands fell principally, as such demands 
always do, on the loan market. A great, though not the 
greatest part of the imported food, was actually paid for by 
the proceeds of a government loan. The extra payments 
which purchasers of corn and cotton, and railway share- 
holders, found themselves obliged to make, were either 
made with their own spare cash, or with money raised for 
the occasion. On the first supposition, they were made by 
withdrawing deposits from bankers, and thus cutting off a 
part of the streams which fed the loan market ; on the sec- 
ond supposition, they were made by actual drafts on the 



72 BOOK III. CHAPTER XII. §4. 

loan market, either by the sale of securities, or by taking 
up money at interest. This combination of a fresh demand 
for loans, with a curtailment of the capital disposable for 
them, raised the rate of interest, and made it impossible to 
borrow except on the very best security. Some firms 
therefore, which by an improvident and unmercantile mode 
of conducting business had allowed their capital to become 
either temporarily or permanently unavailable, became 
unable to command that perpetual renewal of credit which 
had previously enabled them to struggle on. These firms 
stopped payment : their failure involved more or less deeply 
many other firms which had trusted them ; and, as usual in 
such cases, the general distrust, commonly called a panic, 
began to set in, and might have produced a destruction of 
credit equal to that of 1825, had not circumstances which 
may almost be called accidental, given to a very simple 
measure of the government (the suspension of the Bank 
Charter Act of 1844) a fortunate power of allaying panic, to 
which when considered in itself, it had no sort of claim. 

§ 4. The general operation of credit upon prices being 
such as we have described, it is evident that if any particu- 
lar mode or form of credit is calculated to have a greater 
operation on prices than others, it can only be by giving 
greater facility, or greater encouragement, to the multipli- 
cation of credit transactions generally. If bank notes, for 
instance, or bills, have a greater effect on prices than book 
credits, it is not by any difference in the transactions them- 
selves, which are essentially the same, whether taking place 
in the one way or in the other : it must be that there are 
likely to be more of them. If credit is likely to be more 
extensively used as a purchasing power when bank notes or 
bills are the instruments used, than when the credit is given 
by mere entries in an account, to that extent and no more 
there is ground for ascribing to the former a greater power 
over the markets than belongs to the latter. 

Now it appears that there is some such distinction. As far 



INFLUENCE OF CREDIT ON PRICES. 73 

as respects the particular transaction, it makes no difference 
in the effect on price whether A buys goods of B on simple 
credit, or gives a bill for them, or pays for them with bank 
notes lent to him by a banker C. The difference is in a 
subsequent stage. If A has bought the goods on a book 
credit, there is no obvious or convenient mode by which B 
can make A's debt to him a means of extending his own 
credit. Whatever credit he has, will be due to the general 
opinion entertained of his solvency ; he cannot specifically 
pledge A's debt to a third person, as a security for money 
lent or goods bought. But if A has given him a bill for the 
amount, he can get this discounted, which is the same thing 
as borrowing money on the joint credit of A and himself : 
or he may pay away the bill in exchange for goods, which is 
obtaining goods on the same joint credit. In either case, 
here is a second credit transaction, grounded on the first, 
and which would not have taken place if the first had been 
transacted without the intervention of a bill. Nor need the 
transactions end here. The bill may be again discounted, 
or again paid away for goods, several times before it is itself 
presented for payment. Nor would it be correct to say that 
these successive holders, if they had not had the bill, might 
have attained their purpose by purchasing goods on their 
own credit with the dealers. They may not all of them be 
persons of credit, or they may already have stretched, their 
credit as far as it will go. And at all events, either money 
or goods are more readily obtained on the credit of two per- 
sons than of one. Nobody will pretend that it is as easy a 
thing for a merchant to borrow a thousand pounds on his 
own credit, as to get a bill discounted to the same amount, 
when the drawee is of known solvency. 

If we now suppose that A, instead of giving a bill, ob- 
tains a loan of bank notes from a banker C, and with them 
pays B for his goods, we shall find the difference to be still 
greater. B is now independent even of a discounter : A's 
bill would have been taken in payment only by those who 
were acquainted with his reputation for solvency, but a 



74 BOOK III. CHAPTER XII. §4. 

banker is a person who has credit with the public generally, 
and whose notes are taken in payment by every one, at 
least in his own neighbourhood : insomuch that, by a cus- 
tom which has grown into law, payment in bank notes is a 
complete acquittance to the payer, whereas if he has paid 
by a bill, he still remains liable to the debt, if the person on 
whom the bill is drawn fails to pay it when due. B there- 
fore can expend the whole of the bank notes without at all 
involving his own credit : and whatever power he had be- 
fore of obtaining goods on book credit, remains to him un- 
impaired, in addition to the purchasing power he derives 
from the possession of the notes. The same remark applies 
to every person in succession, into whose hands the notes 
may come. It is only A, the first holder, (who used his 
credit to obtain the notes as a loan from the issuer,) who can 
possibly find the credit he possesses in other quarters abated 
by it ; and even in his case that result is not probable ; for 
though, in reason, and if all his circumstances were known, 
every draft already made upon his credit ought to diminish 
by so much his power of obtaining more, yet in practice the 
reverse more frequently happens, and his having been trust- 
ed by one person is supposed to be evidence that he may 
safely be trusted by others also. 

It appears, therefore, that bank notes are a more power- 
ful instrument for raising prices than bills, and bills than 
book credits. It does not, indeed, follow that credit will be 
more used because it can be. "When the state of trade holds 
out no particular temptation to make large purchases on 
credit, dealers will use only a small portion of the credit- 
power, and it will depend only on convenience whether the 
portion which they use will be taken in one form or in 
another. It is not until the circumstances of the markets, 
and the state of the mercantile mind, render many persona 
desirous of stretching their credit to an unusual extent, that 
the distinctive properties of the different forms of credit dis~ 
play themselves. Credit already stretched to the utmost in 
the form of book debts, would be susceptible of a great ad- 



INFLUENCE OF CREDIT ON PRICES. f 5 

ditional extension by means of bills, and of a still greater by 
means of bank notes. The first, because each dealer, in 
addition to his own credit, would be enabled to create a 
further purchasing power out of the credit which he had 
himself given to others : the second, because the banker's 
credit with the public at large, coined into notes, as bullion 
is coined into pieces of money to make it portable and 
divisible, is so much purchasing power superadded, in the 
hands of every successive holder, to that which he may de- 
rive from his own credit. To state the matter otherwise ; 
one single exertion of the credit-power in the form of book 
credit, is only the foundation of a single purchase : but if a 
bill is drawn, that same portion of credit may serve for as 
many purchases as the number of times the bill changes 
hands : while every bank note issued, renders the credit of 
the banker a purchasing power to that amount in the hands 
of all the successive holders, without impairing any power 
they may possess of effecting purchases on their own credit. 
Credit, in short, has exactly the same purchasing power with 
money ; and as money tells upon prices not simply in pro- 
portion to its amount, but to its amount multiplied by the 
number of times it changes hands, so also does credit ; and 
credit transferable from hand to hand is in that proportion 
more potent, than credit which only performs one purchase. 

§ 5. All this purchasing power, however, is operative 
upon prices, only according to the proportion of it which is 
used : and the effect, therefore, is only felt in a state of cir- 
cumstances calculated to lead to an unusually extended use 
of credit. In such a state of circumstances, that is, in spec- 
ulative times, it cannot, I think, be denied, that prices are 
likely to rise higher if the speculative purchases are made 
with bank notes, than when they are made with bills, and 
when made by bills than when made by book credits. This, 
however, is of far less importance than might at first be 
imagined; because, in point of fact, speculative purch;isc< 
are not, in the great majority of cases, made either with 



76 BOOK ni. CHAPTER XII. §5. 

bank notes or with bills, but are made almost exclusively on 
book credits. " Applications to the Bank for extended dis- 
count," says the highest authority on such subjects,* (and 
the same thing must be true of applications to other banks) 
" occur rarely if ever in the origin or progress of extensive 
speculations in commodities. These are entered into, for 
the most part if not entirely, in the first instance, on credit 
for the length of term usual in the several trades ; thus en- 
tailing on the parties no immediate necessity for borrowing 
bo much as may be wanted for the purpose beyond their 
own available capital. This applies particularly to specula- 
tive purchases of commodities on the spot, with a view to 
resale. But these generally form the smaller proportion of 
engagements on credit. By far the largest of those entered 
into on the prospect of a rise of prices, are such as have in 
view importations from abroad. The same remark, too, is 
applicable to the export of commodities, when a large pro- 
portion is on the credit of the shippers or their consignees. 
As long as circumstances hold out the prospect of a favour- 
able result, the credit of the parties is generally sustained. 
If some of them wish to realize, there are others with capital 
and credit ready to replace them ; and if the events fully 
justify the grounds on which the speculative transactions 
were entered into (thus admitting of sales for consumption 
in time to replace the capital embarked) there is no un- 
usual demand for borrowed capital to sustain them. It is 
only when by the vicissitudes of political events, or of the 
seasons, or other adventitious circumstances, the forthcom- 
ing supplies are found to exceed the computed rate of con- 
sumption, and a fall of prices ensues, that an increased de- 
mand for capital takes place ; the market rate of interest 
then rises, and increased applications are made to the Bank 
of England for discount." So that the multiplication of 
bank notes and other transferable paper does not, for the 
most part, accompany and facilitate the speculation ; but 

* Tooke's History of Prices, vol. iv. pp. 125 — 6. 



INFLUENCE OF CREDIT ON PRICES. 77 

comes into play chiefly when the tide is turning, and 
difficulties begin to be felt. 

Of the extraordinary height to which speculative trans- 
actions can be carried upon mere book credits, without the 
smallest addition to what is commonly called the currency, 
very few persons are at all aware. " The power of pur- 
chase," says Mr. Tooke,* " by persons having capital and 
credit, is much beyond anything that those who are unac- 
quainted practically with speculative markets have any idea 
of. ... A person having the reputation of capital enough 
for his regular business, and enjoying good credit in his 
trade, if he takes a sanguine view of the prospect of a rise 
of price of the article in which he deals, and is favoured by 
circumstances in the outset and progress of his speculation, 
may effect purchases to an extent perfectly enormous, com- 
pared with his capital." Mr. Tooke confirms this statement 
by some remarkable instances, exemplifying the immense 
purchasing power which may be exercised, and rise of price 
which may be produced, by credit not represented by either 
bank notes or bills of exchange. 

" Amongst the earlier speculators for an advance in the 
price of tea, in consequence of our dispute with China in 
1839, were several retail grocers and tea-dealers. There 
was a general disposition among the trade to get into stock : 
that is, to lay in at once a quantity which would meet the 
probable demand from their customers for several months to 
come. Some, however, among them, more sanguine and 
adventurous than the rest, availed themselves of their credit 
with the importers and wholesale dealers, for purchasing 
quantities much beyond the estimated demand in their own 
business. As the purchases were made in the first instance 
ostensibly, and perhaps really, for the legitimate purposes 
and within the limits of their regular business, the parties 
were enabled to buy without the condition of any deposit ; 
whereas speculators, known to be such, are required to pay 

* Inquiry into the Currency Principle, pp. 79 and 136 — 8. 



f8 BOOK in. CHAPTER XII. §5. 

2Z. per chest, to cover any probable difference of price which 
might arise before the expiration of the prompt, which, for 
this article, is three months. Without, therefore, the outlay 
of a single farthing of actual capital or currency in any 
shape, they made purchases to a considerable extent ; and 
with the profit realized on the resale of a part of these pur- 
chases, they were enabled to pay the deposit on further 
quantities when required, as was the case when the extent 
of the purchases attracted attention. In this way, the spec- 
ulation went on at advancing prices (100 per cent and up- 
wards) till nearly the expiration of the prompt, and if at that 
time circumstances had been such as to justify the apprehen- 
sion which at one time prevailed, that all future supplies 
would be cut off, the prices might have still further ad- 
vanced, and at any rate not have retrograded. In this case, 
the speculators might have realized, if not all the profit they 
had anticipated, a very handsome sum, upon which they 
might have been enabled to extend their business greatly, 
or to retire from it altogether, with a reputation for great 
sagacity in thus making their fortune. But instead of this 
favourable result, it so happened that two or three cargoes 
of tea which had been transhipped were admitted, contrary 
to expectation, to entry on their arrival here, and it was 
found that further indirect shipments were in progress. 
Thus the supply was increased beyond the calculation of the 
speculators : and at the same time, the consumption had 
been diminished by the high price. There was, conse- 
quently, a violent reaction on the market ; the speculators 
were unable to sell without such a sacrifice as disabled them 
from fulfilling their engagements, and several of them con- 
sequently failed. Among these, one was mentioned, who 
having a capital not exceeding 1,200Z. which was locked up 
in his business, had contrived to buy 4,000 chests, value 
above 80,000Z., the loss upon which was about 16,000Z. 

" The other example, which I have to give, is that of the 
operation on the corn market between 1838 and 1842. 
There was an instance of a person who, when he entered on 



INFLUENCE OF CREDIT ON PRICES. Y9 

his extensive speculations, was, as it appeared by the subse- 
quent examination of his affairs, possessed of a capital not 
exceeding 5000Z., but being successful in the outset, and 
favoured by circumstances in the progress of his operations, 
he contrived to make purchases to such an extent, that 
when he stopped payment his engagements were found to 
amount to between 500,000Z. and 600,000?. Other instances 
might be cited of parties without any capital at all, who, by 
dint of mere credit, were enabled, while the aspect of the 
market favoured their views, to make purchases to a very 
great extent. 

" And be it observed, that these speculations, involving 
enormous purchases on little or no capital, were carried on 
in 1839 and 1840, when the money market was in its most 
contracted state ; or when, according to modern phraseol- 
ogy, there was the greatest scarcity of money." 

But though the great instrument of speculative pur- 
chases is book credits, it cannot be contested that in specu- 
lative periods an increase does take place in the quantity 
both of bills of exchange and of bank notes. This increase, 
indeed, so far as bank notes are concerned, hardly ever takes 
place in the earliest stage of the speculations ; advances 
from bankers (as Mr. Tooke observes) not being applied for 
in order to purchase, but in order to hold on without selling 
when the usual term of credit has expired, and the high 
price which was calculated on has not arrived. But the tea 
speculators mentioned by Mr. Tooke could not have carried 
their speculations beyond the three months which are the 
usual term of credit in their trade, unless they had been 
able to obtain advances from bankers, which, if the expects 
tion of a rise of price had still continued, they probabl) 
could have done. 

Since, then, credit in the form of bank notes is a more 
potent instrument for raising prices than book credits, an 
unrestrained power of resorting to this instrument may con- 
tribute to prolong and heighten the speculative rise of prices, 
and hence aggravate the subsequent recoil. But in what 



80 



BOOK III. CHAPTER XII. §6. 



degree ? and what importance ought we to ascribe to this 
possibility ? It may help us to form some judgment on this 
point, if we consider the proportion which the utmost in- 
crease of bank notes in a period of speculation, bears, I do 
not say to the whole mass of credit in the country, but to 
the bills of exchange alone. The average amount of bills 
in existence at any one time is supposed greatly to exceed a 
hundred millions sterling.* The bank note circulation of 
Great Britain and Ireland seldom exceeds forty millions, and 
the increase in speculative periods at most two or three. 
And even this, as we have seen, hardly ever comes into play 
until that advanced period of the speculation at which the 
tide shows signs of turning, and the dealers generally are 
rather thinking of the means of fulfilling their existing en- 
gagements, than meditating an extension of them : while 
the quantity of bills in existence is largely increased from 
the very commencement of the speculations. 



§ 6. It is well known that of late years, an artificial 

* The most approved estimate is that of Mr. Leatham, grounded on the 
official returns of bill stamps issued. The following are the results: — 



Year. 


Bills created in Great Britain 
and Ireland, founded on 
returns of Bill Stamps 

issued from the Stamp Office. 


Average amount in 

circulation at one time in 

each year. 


1832 
1833 
1834 
1835 
1836 
1837 
1838 
1839 


£356,153,409 
383,659,585 
379,155,052 
405,403,051 
485,943,473 
455,084,445 
465,504,041 
528,493,842 


£8-9,038,352 
95,914,896 
^4,788,763 
101,350,762 
121,485,868 
113,771,111 
116,376,010 
132,123,460 



"Mr. Leatham," says Mr. Tooke, "gives the process by which, upon the 
data furnished by the returns of stamps, he arrives at these results ; and I am 
disposed to think that they are as near an approximation to the truth as the 
nature of the materials admits of arriving at." — Inquiry into the Currency Prin- 
ciple, p. 26. Mr. Neumarch (Appendix No. 39 to Report of the Committee on 
the Bank Acts in 1857, and History of Prices, vol. vi. p. 587) shows grounds 
for the opinion that the total bill circulation in 1857 was not much less than 180 
millions sterling, and that it sometimes rises to 200 millions. 



INFLUENCE OF CREDIT ON PRICES. 81 

limitation of the issue of bank notes has been regarded by 
many political economists, and by a great portion of the 
public, as an expedient of supreme efficacy for preventing, 
and when it cannot prevent, for moderating, the fever of 
speculation ; and this opinion received the recognition and 
sanction of the legislature by the Currency Act of 1844. 
At the point, however, which our inquiries have reached, 
though we have conceded to bank notes a greater power 
over prices than is possessed by bills or book credits, we 
have not found reason to think that this superior efficacy 
has much share in producing the rise of prices which accom- 
panies a period of speculation, nor consequently that any 
restraint applied to this one instrument, can be efficacious 
to the degree which is often supposed, in moderating either 
that rise, or the recoil which follows it. We shall be still 
less inclined to think so, when we consider that there is i 
fourth form of credit transactions, by cheques on bankers, 
and tranfers in a banker's books, which is exactly parallel 
in every respect to bank notes, giving equal facilities to an 
extension of credit, and capable of acting on prices quite as 
powerfully. In the words of Mr. Fullarton,* " there is not 
a single object at present attained through the agency of 
Bank of England notes, which might not be as effectually 
accomplished by each individual keeping an account with 
the bank, and transacting all his payments of five pounds 
and upwards by cheque." A bank, instead of lending its 
notes to a merchant or dealer, might open an account with 
him, and credit the account with the sum it had agreed to 
advance : on an understanding that he should not draw out 
that sum in any other mode than by drawing cheques against 
it in favour of those to whom he had occasion to make pay- 
ments. These cheques might possibly even pass from hand 
to hand like bank notes ; more commonly however the re- 
ceiver would pay them into the hands of his own banker, 
and when he wanted the money, would draw a fresh cheque 
against it : and hence an objector may urge that as the 

* On the Regulation of Currencies, p. 41. 
45 



82 BOOK III. CHAPTER XII. §6. 

original cheque would very soon be presented for payment, 
when it must be paid either in notes or in coin, notes or coin 
to an oqual amount must be provided as the ultimate means 
of liquidation. It is not so, however. The person to whom 
the cheque is transferred, may perhaps deal with the same 
backer, and the cheque may return to the very bank on 
which it was drawn : this is very often the case in country 
districts ; if so, no payment will be called for, but a simple 
transfer in the banker's books will settle the transaction. 
If the cheque is paid into a different bank, it will not be 
presented for payment, but liquidated by set-off against 
other cheques ; and in a state of circumstances favourable 
to a general extension of banking credits, a banker who has 
granted more credit, and has therefore more cheques drawn 
on him, will also have more cheques on other bankers paid 
to him, and will only have to provide notes or cash for the 
payment of balances ; for which purpose the ordinary re- 
serve of prudent bankers, one-third of their liabilities, will 
abundantly suffice. JSTow, if he had granted the extension 
of credit by means of an issue of his own notes, he must 
equally have retained, in coin or Bank of England notes, 
the usual reserve : so that he can, as Mr. Fullarton says, 
give every facility of credit by what may be termed a 
cheque circulation, which he could give by a note circu- 
lation. 

This extension of credit by entries in a banker's books, 
has all that superior efficiency in acting on prices, which we 
ascribed to an extension by means of bank notes. As a 
bank note of 2,01., paid to any one, gives him 201. of pur- 
chasing-power based on credit, over and above whatever 
credit he had of his own, so does a cheque paid to him do 
the same : for, although he may make no purchase with the 
cheque itself, he deposits it with his banker, and can draw 
against it. As this act of drawing a cheque against another 
which has been exchanged and cancelled, can be repeated as 
often as a purchase with a bank note, it effects the same in- 
crease of purchasing power. The original loan, or credit, 



INFLUENCE OF CREDIT ON PRICES. 83 

given by the banker to his customer, is potentially multi- 
plied as a means of purchase, in the hands of the successive 
persons to whom portions of the credit are paid away, j ust 
as the purchasing power of a bank note is multiplied by the 
number of persons through whose hands it passes before it 
is returned to the issuer. 

These considerations abate very much from the impor- 
tance of any effect which can be produced in allaying the 
vicissitudes of commerce, by so superficial a contrivance as 
the one so much relied on of late, the restriction of the issue 
of bank notes by an artificial rule. An examination of all 
the consequences of that restriction, and an estimate of the 
reasons for and against it, must be deferred until we have 
treated of the foreign exchanges, and the international 
movements of bullion. At present we are only concerned 
with the general theory of prices, of which the different in- 
fluence of different kinds of credit is an essential part. 

§ 7. There has been a great amount of discussion and 
argument on the question whether several of these forms of 
credit, and in particular whether bank notes, ought to be 
considered as money. The question is so purely verbal as 
to be scarcely worth raising, and one would have some 
difficulty in comprehending why so much importance is at- 
tached to it, if there were not some authorities who, still 
adhering to the doctrine of the infancy of society and of 
political economy, that the quantity of money, compared 
with that of commodities, determines general prices, think 
it important to prove that bank notes and no other forms 
of credit are money, in order to support the inference that 
bank notes and no other forms of credit influence prices. It 
is obvious, however, that prices do not depend on money, 
but on purchases. Money left with a banker, and not drawn 
against, or drawn against for other purposes than buying 
commodities, has no effect on prices, any more than credit 
which is not used. Credit which is used to purchase com- 
modities, affects prices in the same manner as money. 



84: BOOK III. CHAPTER XII. §7. 

Money and credit are thus exactly on a par, in their effect 
on prices ; and whether we choose to class bank notes 
with the one or the other, is in this respect entirely imma- 
terial. 

Since, however, this question of nomenclature has been 
raised, it seems desirable that it should be answered. The 
reason given for considering bank notes as money, is, that 
by law and usage they have the property, in common with 
metallic money, of finally closing the transactions in which 
they are employed ; while no other mode of paying one 
debt by transferring another, has that privilege. The first 
remark which here suggests itself, is, that on this showing, 
the notes at least of private banks are not money ; for a 
creditor cannot be forced to accept them in payment of a 
debt. They certainly close the transaction if he does accept 
them ; but so, on the same supposition, would a bale of 
cloth, or a pipe of wine ; which are not for that reason re- 
garded as money. It seems to be an essential part of the 
idea of money, that it be legal tender. An inconvertible 
paper which is legal tender is universally admitted to be 
money ; in the French language the phrase jpapier-monnaie 
actually means inconvertibility, convertible notes being 
merely hillets a porteur. It is only in the case of Bank of 
England notes under the law of convertibility, that any 
difficulty arises ; those notes not being a legal tender from 
the Bank itself, though a legal tender from all other persons. 
Bank of England notes undoubtedly do close transactions, 
so far as respects the buyer. When he has once paid in 
Bank of England notes, he can in no case be required to pay 
over again. But I confess I cannot see how the transaction 
can be deemed complete as regards the seller, when he will 
only be found to have received the price of his commodity 
provided the Bank keeps its promise to pay. An instru- 
ment which would be deprived of all value by the insolv- 
ency of a corporation, cannot be money in any sense in 
which money is opposed to credit. It either is not money, 
or it is money and credit too. It may be most suitably 



INFLUENCE OF CREDIT ON PRICES. 85 

described as coined credit. The other forms of credit may 
be distinguished from it as credit in ingots. 

§ 8. Some high authorities have claimed for bank 
notes, as compared with other modes of credit, a greater 
distinction in respect to influence on price than we have 
seen reason to allow ; a difference, not in degree, but in 
kind. They ground this distinction on the fact, that all bills 
and cheques, as well as all book-debts, are from the first in- 
tended to be, and actually are, ultimately liquidated either 
in coin or in notes. The bank notes in circulation, jointly 
with the coin, are therefore, according to these authorities, 
the basis on which all the other expedients of credit rest ; 
and in proportion to the basis will be the superstructure ; 
insomuch that the quantity of bank notes determines that 
of all the other forms of credit. If bank notes are multi- 
plied, there will, they seem to think, be more bills, more 
payments by cheque, and, I presume, more book credits ; 
and, by regulating and limiting the issue of bank notes, they 
think that all other forms of credit are, by an indirect con- 
sequence, brought under a similar limitation. I believe I 
have stated the opinion of these authorities correctly, though 
I have nowhere seen the grounds of it set forth with such 
distinctness as to make me feel quite certain that I under- 
stand them. It may be true, that according as there are 
more or fewer bank notes, there is also, in general (though 
not invariably), more or less of other descriptions of credit ; 
or the same state of affairs which leads to an increase of 
credit in one shape, leads to an increase of it in other shapes. 
But I see no reason for believing that the one is the cause 
of the other. If indeed we begin by assuming, as I suspect 
is tacitly done, that prices are regulated by coin and bank 
notes, the proposition maintained will certainly follow ; for, 
according as prices are higher or lower, the same purchases 
will give rise to bills, cheques, and book credits of a larger 
or a smaller amount. But the premise in this reasoning is 
the very proposition to be proved. Setting this assumption 



86 BOOK HI. CHAPTER XII. §8. 

aside, I know not how the conclusion can be substantiated. 
The credit given to any one by those with whom he deals, 
does not depend on the quantity of bank notes or coin in 
circulation at the time, but on their opinion of his solvency : 
if any consideration of a more general character enters into 
their calculation, it is only in a time of pressure on the loan 
market, when they are not certain of being themselves able 
to obtain the credit on which they have been accustomed to 
rely ; and even then, what they look to is the general state 
of the loan market, and not (preconceived theory apart) the 
amount of bank notes. So far, as to the willingness to give 
credit. And the willingness of a dealer to use his credit, 
depends on his expectations of gain, that is, on his opinion 
of the probable future price of his commodity ; an opinion 
grounded either on the rise or fall already going on, or on 
his prospective judgment respecting the supply and the rate 
of consumption. When a dealer extends his purchases be- 
yond his immediate means of payment, engaging to pay at 
a specified time, he does so in the expectation either that 
the transaction will have terminated favourably before that 
time arrives, or that he shall then be in possession of suf- 
ficient funds from the proceeds of his other transactions. 
The fulfilment of these expectations depends upon prices, 
but not specially upon the amount of bank notes. He may, 
doubtless, also ask himself, in case he should be disappointed 
in these expectations, to what quarter he can look for a tem- 
porary advance, to enable him, at the worst, to keep his en- 
gagements. But in the first place, this prospective reflection 
on the somewhat more or less of difficulty which he may 
have in tiding over his embarrassments, seems too slender 
an inducement to be much of a restraint in a period sup- 
posed to be one of rash adventure, and upon persons so con- 
fident of success as to involve themselves beyond their cer- 
tain means of extrication. And further, I apprehend that 
their confidence of being helped out in the event of ill-for- 
tune, will mainly depend on their opinion of their own indi- 
vidual credit, with, perhaps, some consideration, not of the 



INFLUENCE OF CREDIT ON PRICES. 87 

quantity of the currency, but of the general state of the loan 
market. They are aware that, in case of a commercial crisis, 
they shall have difficulty in obtaining advances. But if they 
thought it likely that a commercial crisis would occur be- 
fore they had realized, they would not speculate. If no 
great contraction of general credit occurs, they will feel no 
doubt of obtaining any advances which they absolutely re- 
quire, provided the state of their own affairs at the time 
aifords in the estimation of lenders a sufficient prospect that 
those advances will be repaid. 



CHAPTER XIII. 

OF AN INCONVERTIBLE PAPER CURRENCY. 

§ 1. After experience had shown that pieces of paper, of 
no intrinsic value, by merely bearing upon them the written 
profession of being equivalent to a certain number of francs, 
dollars, or pounds, could be made to circulate as such, and 
to produce all the benefit to the issuers which could have 
been produced by the coins which they purported to repre- 
sent ; governments began to think that it would be a happy 
device if they could appropriate to themselves this benefit, 
free from the condition to which individuals issuing such 
paper substitutes for money were subject, of giving, when 
required, for the sign, the thing signified. They determined 
to try whether they could not emancipate themselves from 
this unpleasant obligation, and make a piece of paper issued 
by them pass for a pound, by merely calling it a pound, and 
consenting to receive it in payment of the taxes. And such 
is the influence of almost all established governments, that 
they have generally succeeded in attainirg this object : I 
believe I might say they have always succeeded for a time, 
and the power has only been lost to them after they had 
compromised it by the most flagrant abuse. 

In the case supposed, the functions of money are per- 
formed by a thing which derives its power of performing 
them solely from convention ; but convention is quite suffi- 
cient to confer the power ; since nothing more is needful to 
make a person accept anything as money, and even at any 
arbitrary value, than the persuasion that it will be taken 



iNCONVERTIBLE PAPER CURRENCY. 89 

from him on the same terms by others. The only question is, 
what determines the value of such a currency ; since it can- 
not be, as in the case of gold and silver (or paper exchange- 
able for them at pleasure), the cost of production. 

We have seen, however, that even in the case of metal- 
lic currency, the immediate agency in determining its value 
is its quantity. If the quantity, instead of depending on 
the ordinary mercantile motives of profit and loss, could be 
arbitrarily fixed by authority, the value would depend on 
the fiat of that authority, not on cost of production. The 
quantity of a paper currency not convertible into the metals 
at the option of the holder, can be arbitrarily fixed ; espe- 
cially if the issuer is the sovereign power of the state. The 
value, therefore, of such a currency, is entirely arbitrary. 

Suppose that, in a country of which the currency is 
wholly metallic, a paper currency is suddenly issued, to the 
amount of half the metallic circulation : not by a banking 
establishment, or in the form of loans, but by the govern- 
ment, in payment of salaries and purchase of commodities. 
The currency being suddenly increased by one-half, all prices 
will rise, and among the rest, the prices of all things made 
of gold and silver. An ounce of manufactured gold will be- 
come more valuable than an ounce of gold coin, by more 
than that customary difference which compensates for the 
value of the workmanship ; and it will be profitable to melt 
the coin for the purpose of being manufactured, until as 
much has been taken from the currency by the subtraction 
of gold, as had been added to it by the issue of paper. Then 
prices will relapse to what they were at first, and there will 
be nothing changed except that a paper currency has been 
substituted for half of the metallic currency which existed 
before. Suppose, now, a second emission of paper ; the 
same series of effects will be renewed ; and so on, until the 
whole of the metallic money has disappeared : that is, if 
paper be issued of as low a denomination as the lowest coin ; 
if not, as much will remain, as convenience requires for the 
smaller payments. The addition made to the quantity of 



90 BOOK III. CHAPTER XIII. §1. 

gold and silver disposable for ornamental purposes, will 
somewhat reduce, for a time, the value of the article ; and 
as long as this is the case, even though paper has been 
issued to the original amount of the metallic circulation, as 
much coin will remain in circulation along with it, as will 
keep the value of the currency down to the reduced value 
of the metallic material ; but the value having fallen below 
the cost of production, a stoppage or diminution of the sup- 
ply from the mines will enable the surplus to be carried off 
by the ordinary agents of destruction, after which, the 
metals and the currency will recover their natural value. 
We are here supposing, as we have supposed throughout, 
that the country has mines of its own, and no commercial 
intercourse with other countries : for, in a country having 
foreign trade, the coin which is rendered superfluous by an 
issue of paper is carried off by a much prompter method. 

Up to this point, the effects of a paper currency are sub- 
stantially the same, whether it is convertible into specie or 
not. It is when the metals have been completely super- 
seded and driven from circulation, that the difference be- 
tween convertible and inconvertible paper begins to be 
operative. When the gold or silver has all gone from cir- 
culation, and an equal quantity of paper has taken its place, 
suppose that a still further issue is superadded. The same 
series of phenomena recommences : prices rise, among the 
rest the prices of gold and silver articles, and it becomes an 
object as before to procure coin in order to convert it into 
bullion. There is no longer any coin in circulation ; but if 
the paper currency is convertible, coin may still be obtained 
from the issuers, in exchange for notes. All additional notes, 
therefore, which are attempted to be forced into circulation 
after the metals have been completely superseded, will re- 
turn upon the issuers in exchange for coin ; and they will 
not be able to maintain in circulation such a quantity of 
convertible paper, as to sink its value below the metal which 
it represents. It is not so, however, with an inconvertible 
currency. To the increase of that (if permitted by law) 



INCONVERTIBLE PAPER CURRENCY. 91 

there is no check. The issuers may add to it indefinitely, 
lowering its value and raising prices in proportion ; they 
may, in other words, depreciate the currency without limit. 
Such a power, in whomsoever vested, is an intolerable 
evil. All variations in the value of the circulating medium 
are mischievous : they disturb existing contracts and expec- 
tations, and the liability to such changes renders every 
pecuniary engagement of long date entirely precarious. 
The person who buys for himself, or gives to another, an 
annuity of 100?., does not know whether it will be equiva- 
lent to 200Z. or to 501. a few years hence. Great as this 
evil would be if it depended only on accident, it is still 
greater when placed at the arbitrary disposal of an individ- 
ual or a body of individuals ; who may have any kind or 
degree of interest to be served by an artificial fluctuation in 
fortunes ; and who have at any rate a strong interest in 
issuing as much as possible, each issue being in itself a 
source of profit. Not to add, that the issuers may have, 
and in the case of a government paper, always have, a 
direct interest in lowering the value of the currency, because 
it is the medium in which their own debts are computed. 

§ 2. In order that the value of the currency may be 
secure from being altered by design, and may be as little as 
possible liable to fluctuation from accident, the articles least 
liable of all known commodities to vary in their value, the 
precious metals, have been made in all civilized countries 
the standard of value for the circulating medium ; and no 
paper currency ought to exist of which the value cannot be 
made to conform to theirs. Nor has this fundamental 
maxim ever been entirely lost sight of, even by the govern- 
ments which have most abused the power of creating incon- 
vertible paper. If they have not (as they generally have) 
professed an intention of paying in specie at some indefinite 
future time, they have at least, by giving to their paper 
issues the names of their coins, made a virtual, though gen- 
erally a false, profession of intending to keep them at a 



92 BOOK III. CHAPTER XIII. §2. 

value corresponding to that of the coins. This is not im- 
practicable, even with an inconvertible paper. There is not 
indeed the self-acting check which convertibility brings 
with it. But there is a clear and unequivocal indication by 
which to judge whether the currency is depreciated, and to 
what extent. That indication is, the price of the precious 
metals. "When holders of paper cannot demand coin to be 
converted into bullion, and when there is none left in circu- 
lation, bullion rises and falls in price like other things ; and 
if it is above the mint price, if an ounce of gold, which 
would be coined into the equivalent of SI. 17s. 10^d., is sold 
for 41. or 51. in paper, the value of the currency has sunk 
just that much below what the value of a metallic currency 
would be. If, therefore, the issue of inconvertible paper 
were subjected to strict rules, one rule being that whenever 
bullion rose above the mint price, the issues should be con- 
tracted until the market price of bullion and the mint price 
were again in accordance, such a currency would not be 
subject to any of the evils usually deemed inherent in an 
inconvertible paper. 

But also such a system of currency would have no ad- 
vantages sufficient to recommend it to adoption. An incon- 
vertible currency, regulated by the price of bullion, would 
conform exactly, in all its variations, to a convertible one ; 
and the only advantage gained, would be that of exemption 
from the necessity of keeping any reserve of the precious 
metals ; which is not a very important consideration, espe- 
cially as a government, so long as its good faith is not sus- 
pected, needs not keep so large a reserve as private issuers, 
being not so liable to great and sudden demands, since there 
never can be any real doubt of its solvency. Against this 
small advantage is to be set, in the first place, the possibility 
of fraudulent tampering with the price of bullion for the sake 
of acting on the currency ; in the manner of the fictitious 
sales of corn, to influence the averages, so much and so justly 
complained of while the corn laws were in force. But a 
still stronger consideration is the importance of adhering to 



INCONVERTIBLE PAPER CURRENCY. 93 

a simple principle, intelligible to the most untaught capacity. 
Everybody can understand convertibility ; every one sees 
that what can be at any moment exchanged for five pounds, 
is worth five pounds. Regulation by the price of bullion is 
a more complex idea, and does not recommend itself through 
the same familiar associations. There would be nothing like 
the same confidence, by the public generally, in an incon- 
vertible currency so regulated, as in a convertible one : and 
the most instructed person might reasonably doubt whether 
such a rule would be as likely to be inflexibly adhered to. 
The grounds of the rule not being so well understood by the 
public, opinion would probably not enforce it with as much 
rigidity, and, in any circumstances of difficulty, would be 
likely to turn against it ; while to the government itself a 
suspension of convertibility would appear a much stronger 
and more extreme measure, than a relaxation of what might 
possibly be considered a somewhat artificial rule. There is 
therefore a great preponderance of reasons in favour of a 
convertible, in preference to even the best regulated incon- 
vertible currency. The temptation to over-issue, in certain 
financial emergencies, is so strong, that nothing is admissible 
which can tend, in however slight a degree, to weaken the 
barriers that restrain it. 

§ 3. Although no doctrine in political economy rests on 
more obvious grounds than the mischief of a paper currency 
not maintained at the same value with a metallic, either by 
convertibility, or by some principle of limitation equivalent 
to it ; and although, accordingly, this doctrine has, though 
not till after the discussions of many years, been tolerably 
effectually drummed into the public mind ; yet dissentients 
are still numerous, and projectors every now and then start 
up, with plans for curing all the economical evils of society 
by means of an unlimited issue of inconvertible paper. 
There is, in truth, a great charm in the idea. To be able to 
pay off the national debt, defray the expenses of government 
without taxation, and in fine, to make the fortunes of the 



94 BOOK III. CHAPTER XIII. § 3. 

whole community, is a brilliant prospect, when once a man 
is capable of believing that printing a few characters on bits 
of paper will do it. The philosopher's stone could not be 
expected to do more. 

As these projects, however often slain, always resusci- 
tate, it is not superfluous to examine one or two of the fal- 
lacies by which the schemers impose upon themselves. One 
of the commonest is, that a paper currency cannot be issued 
in excess so long as every note issued represents property, 
or has a foundation of actual property to rest on. These 
phrases, of representing and resting, seldom convey any dis- 
tinct or well-defined idea : when they do, their meaning is 
no more than this — that the issuers of the paper must have 
property, either of their own, or entrusted to them, to the 
value of all the notes they issue ; though for what purpose 
does not very clearly appear ; for if the property cannot be 
claimed in exchange for the notes, it is difficult to divine in 
what manner its mere existence can serve to uphold their 
value. I presume, however, it is intended as a guarantee 
that the holders would be finally reimbursed, in case any 
untoward event should cause the whole concern to be wound 
up. On this theory there have been many schemes for 
" coining the whole land of the country into money " and 
the like. 

In so far as this notion has any connexion at all with 
reason, it seems to originate in confounding two entirely dis- 
tinct evils, to which a paper currency is liable. One is, the 
insolvency of the issuers ; which, if the paper is grounded 
on their credit — if it makes any promise of payment in cash, 
either on demand or at any future time — of course deprives 
the paper of any value which it derives from the promise. 
To this evil paper credit is equally liable, however mode- 
rately used ; and against it, a proviso that all issues should 
be " founded on property," as for instance that notes should 
only be issued on the security of some valuable thing ex- 
pressly pledged for their redemption, would really be effica- 
cious as a precaution. But the theory takes no account of 



INCONVERTIBLE PAPER CURRENCY. 95 

another evil, which is incident to the notes of the most 
solvent firm, company, or government : that of being depre- 
ciated in value from being issued in excessive quantity. 
The assignats, during the French Revolution, were an 
example of a currency grounded on these principles. Th« 
assignats " represented " an immense amount of highly 
valuable property, namely the lands of the crown, the 
church, the monasteries, and the emigrants ; amounting 
possibly to half the territory of France. They were in 
fact, orders or assignments on this mass of land. The revo- 
lutionary government had the idea of " coining ; ' these lands 
into money ; but, to do them justice, they did not originally 
contemplate the immense multiplication of issues to which 
they were eventually driven by the failure of all other finan- 
cial resources. They imagined that the assignats would come 
rapidly back to the issuers in exchange for land, and that 
they should be able to reissue them continually until the 
lands were all disposed of, without having at any time more 
than a very moderate quantity in circulation. Their hope 
was frustrated : the land did not sell so quickly as they ex- 
pected ; buyers were not inclined to invest their money in 
possessions which were likely to be resumed without com- 
pensation if the Revolution succumbed : the bits of paper 
which represented land, becoming prodigiously multiplied, 
could no more keep up their value than the land itself 
would have done if it had all been brought to market at 
once : and the result was that it at last required an assignat 
of five hundred francs to pay for a cup of coffee. 

The example of the assignats has been said not to be 
conclusive, because an assignat only represented land in 
general, but not a definite quantity of land. To have pre- 
vented their depreciation, the proper course, it is affirmed, 
would have been to have made a valuation of all the confis- 
cated property at its metallic value, and to have issued as- 
signats up to, but not beyond, that limit ; giving to the 
holders a right to demand any piece of land, at its regis- 
tered valuation, in exchange for assignats to the same 



96 BOOK III. CHAPTER XIII. §4. 

amount. There can be no question about the superiority of 
this plan over the one actually adopted. Had this course 
been followed, the assignats could never have been depreci- 
ated to the inordinate degree they were ; for — as they would 
have retained all their purchasing power in relation to land, 
however much they might have fallen in respect to other 
things — before they had lost very much of their market 
value, they would probably have been brought in to be ex- 
changed for land. It must be remembered, however, that 
their not being depreciated would presuppose that no greater 
number of them continued in circulation than would have 
circulated if they had been convertible into cash. However 
convenient, therefore, in a time of revolution, this currency 
convertible into land on demand might have been, as a con- 
trivance for selling rapidly a great quantity of land with the 
least possible sacrifice ; it is difficult to see what advantage 
it would have, as the permanent system of a country, over 
a currency convertible into coin : while it is not at all diffi- 
cult to see what would be its disadvantages ; since land is far 
more variable in value than gold and silver ; and besides, 
land, to most persons, being rather an incumbrance than a 
desirable possession, except to be converted into money, 
people would submit to a much greater depreciation before 
demanding land, than they will before demanding gold or 
silver.* 

§ 4. Another of the fallacies from which the advocates 
of an inconvertible currency derive support, is the Viotion 

* Among the schemes of currency to which, strange to say, intelligent 
writers have been found to give their sanction, one is as follows : that the state 
should receive in pledge or mortgage, any kind or amount of property, such a? 
land, stock, &c, and should advance to the owners inconvertible paper money 
to the estimated value. Such a currency would not even have the recommenda- 
tions of the imaginary assignats supposed in the text ; since those into whose 
hands the notes were paid by the persons who received them, could not return 
them to the Government, and demand in exchange land or stock which was only 
pledged, not alienated. There would be no reflux of such assignats as these, 
and their depreciation would be indefinite. 



INCONVERTIBLE PAPER CURRENCY. 97 

that an increase of the currency quickens industry. This 
idea was set afloat by Hume, in his Essay on Money, and 
has had many devoted adherents since ; witness the Bir- 
mingham currency school, of whom Mr. Attwood was at 
one time the most conspicuous representative. Mr. Att- 
wood maintained that a rise of prices produced by an in- 
crease of paper currency, stimulates every producer to his 
utmost exertions, and brings all the capital and labour of 
the country into complete employment ; and that this has 
invariably happened in all periods of rising prices, when 
the rise was on a sufficiently great scale. I presume, how- 
ever, that the inducement which, according to Mr. Attwood, 
excited this unusual ardour in all persons engaged in pro- 
duction, must have been the expectation of getting more of 
commodities generally, more real wealth, in exchange for 
the produce of their labour, and not merely more pieces of 
paper. This expectation, however, must have been, by the 
very terms of the supposition, disappointed, since, all prices 
being supposed to rise equally, no one was really better 
paid for his goods than before. Those who agree with Mr. 
Attwood could only succeed in winning people on to these 
unwonted exertions, by a prolongation of what would in 
fact be a delusion ; contriving matters so, that by a progres- 
sive rise of money prices, every producer shall always seem 
to be in the very act of obtaining an increased remuneration 
which he never, in reality, does obtain. It is unnecessary 
to advert to any other of the objections to this plan, than 
that of its total impracticability. It calculates on finding 
the whole world persisting for ever in the belief that more 
pieces of paper are more riches, and never discovering that, 
with all their paper, they cannot buy more of anything than 
they could before. ISTo such mistake was made during any 
of the periods of high prices, on the experience of which this 
school lays so much stress. At the periods which Mr. Att- 
wood mistook for times of prosperity, and which were sim- 
ply (as all periods of high prices, under a convertible cur- 
rency, must be) times of speculation, the speculators did not 
46 



98 BOOK IE. CHAPTER XIII. §4. 

think they were growing rich because the high prices 
would last, but because they would not last, and because 
whoever contrived to realize while they did last, would find 
himself, after the recoil, in possession of a greater number 
of pounds sterling, without their having become of less 
value. If, at the close of the speculation, an issue of paper 
had been made, sufficient to keep prices up to the point 
which they attained when at the highest, no one would have 
been more disappointed than the speculators ; since the gain 
which they thought to have reaped by realizing in time (at 
the expense of their competitors, who bought when they 
sold, and had to sell after the revulsion) would have faded 
away in their hands, and instead of it they would have got 
nothing except a few more paper tickets to count by. 

Hume's version of the doctrine differed in a slight de- 
gree from Mr. Attwood's. He thought that all commodities 
would not rise in price simultaneously, and that some per- 
sons therefore would obtain a real gain, by getting more 
money for what they had to sell, while the things which 
they wished to buy might not yet have risen. And those 
who would reap this gain would always be (he seems to 
think) the first comers. It seems obvious, however, that 
for every person who thus gains more than usual, there is 
necessarily some other person who gains less. The loser, if 
things took place as Hume supposes, would be the seller of 
the commodities which are slowest to rise ; who, by the sup- 
position, parts with his goods at the old prices, to purchasers 
who have already benefited by the new. This seller has 
obtained for his commodity only the accustomed quantity 
of money, while there are already some things of which 
that money will no longer purchase as much as before. If, 
therefore, he knows what is going on, he will raise his price, 
and then the buyer will not have the gain, which is sup- 
posed to stimulate his industry. But if, on the contrary, 
the seller does not know the state of the case, and only dis- 
covers it when he finds, in laying his money out, that it 
does not go so far, he then obtains less than the ordinary 



INCONVERTIBLE PAPER CURRENCY. 99 

remuneration for his labour and capital ; and if the other 
dealer's industry is encouraged, it should seem that his 
must, from the opposite cause, be impaired. 

§ 5. There is no way in which a general and perma- 
nent rise of prices, or in other words, depreciation of money, 
can benefit anybody, except at the expense of somebody 
else. The substitution of paper for metallic currency is a 
national gain : any further increase of paper beyond this is 
but a form of robbery. 

An issue of notes is a manifest gain to the issuers, who, 
until the notes are returned for payment, obtain the use of 
them as if they were a real capital : and so long as the notes 
are no permanent addition to the currency, but merely su- 
persede gold or silver to the same amount, the gain of the 
issuer is a loss to no one ; it is obtained by saving to the 
community the expense of the more costly material. But 
if there is no gold or silver to be superseded — if the notes 
are added to the currency, instead of being substituted for 
the metallic part of it — all holders of currency lose, by the 
depreciation of its value, the exact equivalent of what the 
issuer gains. A tax is virtually levied on them for his ben- 
efit. It will be objected by some, that gains are also made 
by the producers and dealers who, by means of the in- 
creased issue, are accommodated with loans. Theirs, how- 
ever, is not an additional gain, but a portion of that which 
is reaped by the issuer at the expense of all possessors of 
money. The profits arising from the contribution levied 
upon the public, he does not keep to himself, but divides 
with his customers. 

But besides the benefit reaped by the issuers, or by 
others through them, at the expense of the public generally, 
there is another unjust gain obtained by a larger class, 
namely by those who are under fixed pecuniary obligations. 
All such persons are freed, by a depreciation of the curren- 
cy, from a portion of the burthen of their debts or other en- 
gagements : in other words, part of the property of their 



100 BOOK III. CHAPTER XIII. §6. 

creditors is gratuitously transferred to them. On a super- 
ficial view it may be imagined that this is an advantage to 
industry ; since the productive classes are great borrowers, 
and generally owe larger debts to the unproductive (if we 
include among the latter all persons not actually in busi- 
ness) than the unproductive classes owe to them ; especially 
if the national debt be included. It is only thus that a gen- 
eral rise of prices can be a source of benefit to producers 
and dealers ; by diminishing the pressure of their fixed bur- 
thens. And this might be accounted an advantage, if in- 
tegrity and good faith were of no importance to the world, 
and to industry and commerce in particular. Not many, 
however, have been found to say that the currency ought to 
be depreciated on the simple ground of its being desirable 
to rob the national creditor and private creditors of a part 
of what is in their bond. The schemes which have tended 
that way have almost always had some appearance of spe- 
cial and circumstantial justification, such as the necessity of 
compensating for a prior injustice committed in the contrary 
direction. 

§ 6. Thus in England, for many years subsequent to 
1819, it was pertinaciously contended, that a large portion 
of the national debt, and a multitude of private debts still 
in existence, were contracted between 1797 and 1819, when 
the Bank of England was exempted from giving cash for 
its notes ; and that it is grossly unjust to borrowers (that is, 
in the case of the national debt, to all tax-payers) that they 
should be paying interest on the same nominal sums in a 
currency of full value, which were borrowed in a depreciated 
one. The depreciation, according to the views and objects 
of the particular writer, was represented to have averaged 
thirty, fifty, or even more than fifty per cent : and the con- 
clusion was, that either we ought to return to this depreci- 
ated currency, or to strike off from the national debt, and 
from mortgages or other private debts of old standing, a 
percentage corresponding to the estimated amount of the 
depreciation. 



INCONVERTIBLE PAPER CURRENCY. 101 

To this doctrine, the following was the answer usually 
made. Granting that, by returning to cash payments with- 
out lowering the standard, an injustice was done to debtors, 
in holding them liable for the same amount of a currency 
enhanced in value, which they had borrowed while it was 
depreciated ; it is now too late to make reparation for this 
injury. The debtors and creditors of to-day are not the 
debtors and creditors of 1819 : the lapse of years has entire- 
jy altered the pecuniary relations of the community ; and it 
being impossible now to ascertain the particular persons 
who were either benefited or injured, to attempt to retrace 
our steps would be not redressing a wrong, but superadding 
a second act of wide-spread injustice to the one already 
committed. This argument is certainly conclusive on the 
practical question ; but it places the honest conclusion on 
too narrow and too low a ground. It concedes that the 
measure of 1819, called Peel's Bill, by which cash payments 
were resumed at the original standard of 31. 17s. 10%d., was 
really the injustice it was said to be. This is an admission 
wholly opposed to the truth. Parliament had no alterna- 
tive ; it was absolutely bound to adhere to the acknowl- 
edged standard ; as may be shown on three distinct grounds, 
two of fact, and one of principle. 

The reasons of fact are these. In the first place, it is not 
true that the debts, private or public, incurred during the 
Bank restriction, were contracted in a currency of lower 
value than that in which the interest is now paid. It is in- 
deed true that the suspension of the obligation to pay in 
specie, did put it in the power of the Bank to depreciate the 
currency. It is true also that the Bank really exercised 
that power, though to a far less extent than is often pre- 
tended ; since the difference between the market price of 
gold and the .mint valuation, during the greater part of the 
interval, was very trifling, and when it was greatest, during 
the last five years of the war, did not much exceed thirty 
per cent. To the extent of that difference, the currency 
was depreciated, that is, its value was below that of the 



102 BOOK III. CHAPTER XIII. §6. 

standard to which it professed to adhere. But the state of 
Europe at that time was such — there was so unusual an 
absorption of the precious metals, by hoarding, and in the 
military chests of the vast armies which then desolated the 
Continent, that the value of the standard itself was very 
considerably raised : and the best authorities, among whom 
it is sufficient to name Mr. Tooke, have, after an elaborate 
investigation, satisfied themselves that the difference be- 
tween paper and bullion was not greater than the enhance- 
ment in value of gold itself, and that the paper, though de- 
preciated relatively to the then value of gold, did not sink 
below the ordinary value at other times, either of gold or of 
a convertible paper. If this be true (and the evidences of 
the fact are conclusively stated in Mr. Tooke' s History of 
Prices) the foundation of the whole case against the fund- 
holder and other creditors on the ground of depreciation is 
subverted. 

But, secondly, even if the currency had really been low 
ered in value at each period of the Bank restriction, in the 
same degree in which it was depreciated in relation to its 
standard, we must remember that a part only of the na- 
tional debt, or of other permanent engagements, was in- 
curred during the Bank restriction. A large part had been 
contracted before 1797 ; a still larger during the early 
years of the restriction, when the difference between paper 
and gold was yet small. To the holders of the former part, 
an injury was done, by paying the interest for twenty-two 
years in a depreciated currency : those of the second, suf- 
fered an injury during the years in which the interest was 
paid in a currency more depreciated than that in which the 
loans were contracted. To have resumed cash payments at 
a lower standard would have been to perpetuate the injury 
to these two classes of creditors, in order to avoid giving an 
undue benefit to a third class, who had lent their money 
during the few years of greatest depreciation. As it is, there 
was an underpayment to one set of persons, and an overpay- 
ment to another. The late Mr. Mushet took the trouble to 



INCONVERTIBLE PAPER CURRENCY. 103 

make an arithmetical comparison between the two amounts. 
He ascertained by calculation, that if an account had been 
made out in 1819, of what the fundholders had gained and 
lost by the variation of the paper currency from its stand- 
ard, they would have been found as a body to have been 
losers ; so that if any compensation was due on the ground 
of depreciation, it would not be from the fundholders col- 
lectively, but to them. 

Thus it is with the facts of the case. But these reasons 
of fact are not the strongest. There is a reason of prin- 
ciple, still more powerful. Suppose that, not a part of the 
debt merely, but the whole, had been contracted in a depre- 
ciated currency, depreciated not only in comparison with its 
standard, but with its own value before and after ; and that 
we were now paying the interest of this debt in a currency 
fifty or even a hundred per cent more valuable than that 
in which it was contracted. What difference would this 
make in the obligation of paying it, if the condition that it 
should be so paid was part of the original compact ? Now 
this is not only truth, but less than the truth. The compact 
stipulated better terms for the fundholder than he has re- 
ceived. During the whole continuance of the Bank restric- 
tion, there was a parliamentary pledge, by which the legisla- 
ture was as much bound as any legislature is capable of 
binding itself, that cash payments should be resumed on the 
original footing, at farthest in six months after the conclu- 
sion of a general peace. This was therefore an actual con- 
dition of every loan ; and the terms of the loan were more 
favourable in consideration of it. Without some such stipu- 
lation, the Government could not have expected to borrow 
unless on the terms on which loans are made to the native 
princes of India. If it had been understood and avowed 
that, after borrowing the money, the standard at which it 
was computed might be permanently lowered, to any extent 
which to the " collective wisdom " of a legislature of bor- 
rowers might seem fit — who can say what rate of interest 
would have been a sufficient inducement to persons of com- 



104 B OOK III. CHAPTER XIII. §6. 

mon sense to risk their savings in such an adventure ? How- 
ever much the fundholders had gained by the resumption 
of cash payments, the terms of the contract insured their 
giving ample value for it. They gave value for more than 
they received; since cash payments were not resumed in 
six months, but in as many years, after the peace. So that 
waiving all our arguments except the last, and conceding all 
the facts asserted on the other side of the question, the fund- 
holders, instead of being unduly benefited, are the injured 
party ; and would have a claim of compensation, if such 
claims were not very properly barred by the impossibility 
of adjudication, and by the salutary general maxim of law 
and policy " quod interest reipublicse. ut sit finis litium." 






CHAPTEK XIV. 



OF EXCESS OF SUPPLY. 



§ 1. After the elementary exposition of the theory of 
money contained in the last few chapters, we shall return to 
a question in the general theory of Value, which could not 
be satisfactorily discussed until the nature and operations 
of Money were in some measure understood, because the 
errors against which we have to contend mainly originate 
in a misunderstanding of those operations. 

We have seen that the value of everything gravitates 
towards a certain medium point (which has been called the 
Natural Value), namely, that at which it exchanges for 
every other thing in the ratio of their cost of production. 
We have seen, too, that the actual or market value coin- 
cides, or nearly so, with the natural value, only on an ave- 
rage of years ; and is continually either rising above, or 
falling below it, from alterations in the demand, or casual 
fluctuations in the supply : but that these variations correct 
themselves, through the tendency of the supply to accom- 
modate itself to the demand which exists for the commodity 
at its natural value. A general convergence thus results 
from the balance of opposite divergences. Dearth, or scarci- 
ty, on the one hand, and over-supply, or, in mercantile lan- 
guage, glut, on the other, are incident to all commodities. 
In the first case, the commodity affords to the producers or 
sellers, while the deficiency lasts, an unusually high rate of 
profit : in the second, the supply being in excess of that for 
which a demand exists at such a value as will afford the 



106 BOOK III. CHAPTER XIV. §]. 

ordinary profit, the sellers must be content with less, and 
must, in extreme cases, submit to a loss. 

Because this phenomenon of over-supply, and consequent 
inconvenience or loss to the producer or dealer, may exist in 
the case of any one commodity whatever, many persons, in- 
cluding some distinguished political economists, have thought 
that it may exist with regard to all commodities ; that there 
may be a general over-production of wealth ; a supply of 
commodities in the aggregate, surpassing the demand ; and 
a consequent depressed condition of all classes of producers. 
Against this doctrine, of which Mr. Malthus and Dr. Chal- 
mers in this country, and M. de Sismondi on the Continent, 
were the chief apostles, I have already contended in the 
First Book ; * but it was not possible, in that stage of our 
inquiry, to enter into a complete examination of an error 
(as I conceive) essentially grounded on a misunderstanding 
of the phenomena of Value and Price. 

The doctrine appears to me to involve so much incon- 
sistency in its very conception, that I feel considerable diffi- 
culty in giving any statement of it which shall be at once 
clear, and satisfactory to its supporters. They agree in main- 
taining that there may be, and sometimes is, an excess of 
productions in general beyond the demand for them ; that 
when this happens, purchasers cannot be found at prices 
which will repay the cost of production with a profit ; that 
there ensues a general depression of prices or values (they 
are seldom accurate in discriminating between the two), 
so that producers, the more they produce, find them- 
selves the poorer, instead of richer ; and Dr. Chalmers ac- 
cordingly inculcates on capitalists the practice of a moral 
restraint in reference to the pursuit of gain ; while Sismondi 
deprecates machinery, and the various inventions which in- 
crease productive power. They both maintain that accumu- 
lation of capital may proceed too fast, not merely for the 
moral, but for the material interest of those who produce 

* Supra, vol. i. pp. 98 — 101. 



EXCESS OF SUPPLY. 107 

and accumulate ; and they enjoin the rich to guard against 
this evil by an ample unproductive consumption. 

§ 2. When these writers speak of the supply of com- 
modities as outrunning the demand, it is not clear which of 
the two elements of demand they have in view — the desire 
to possess, or the means of purchase ; whether their mean- 
ing is that there are, in such cases, more consumable prod- 
ucts in existence than the public desires to consume, or 
merely more than it is able to pay for. In this uncertainty, 
it is necessary to examine both suppositions. 

First, let us suppose that the quantity of commodities 
produced is not greater than the community would be glad 
to consume : is it, in that case, possible that there should 
be a deficiency of demand for all commodities, for want of 
the means of payment ? Those who think so cannot have 
considered what it is which constitutes the means of pay- 
ment for commodities. It is simply, commodities. Each 
person's means of paying for the productions of other peo- 
ple consists of those which he himself possesses. All sellers 
are inevitably and ex vi termini buyers. Could we sudden- 
ly double the productive powers of the country, we should 
double the supply of commodities in every market ; but we 
should, by the same stroke, double the purchasing power. 
Everybody would bring a double demand as well as sup- 
ply : everybody would be able to buy twice as much, be- 
cause every one would have twice as much to offer in ex- 
change. It is probable, indeed, that there would now be a 
superfluity of certain things. Although the community 
would willingly double its aggregate consumption, it may 
already have as much as it desires of some commodities, 
and it may prefer to do more than double its consumption 
of others, or to exercise its increased purchasing power on 
some new thing. If so, the supply will adapt itself accord- 
ingly, and the values of things will continue to conform to 
their cost of production. At any rate, it is a sheer absurdity 
that all things should fall in value, and that all producers 



108 BOOK III. CHAPTER XTV. §3. 

should, in consequence, be insufficiently remunerated. If 
values remain the same, what becomes of prices is immate- 
rial, since the remuneration of producers does not depend 
on how much money, but on how much of consumable arti- 
cles, they obtain for their goods. Besides, money is a com- 
modity ; and if all commodities are supposed to be doubled 
in quantity, we must suppose money to be doubled too, and 
then prices would no more fall than values would. 

§ 3. A general over-supply, or excess of all commod- 
ities above the demand, so far as demand consists in means 
of payment, is thus shown to be an impossibility. But it 
may perhaps be supposed that it is not the ability to pur- 
chase, but the desire to possess, that falls short, and that the 
general produce of industry may be greater than the com- 
munity desires to consume — the part, at least, of the com- 
munity which has an equivalent to give. It is evident 
enough, that produce makes a market for produce, and that 
there is wealth in the country with which to purchase all 
the wealth in the country ; but those who have the means, 
may not have the wants, and those who have the wants may 
be without the means. A portion, therefore, of the com- 
modities produced may be unable to find a market, from 
the absence of means in those who have the desire to 
consume, and the want of desire in those who have the 
means. 

This is much the most plausible form of the doctrine, 
and does not, like that which we first examined, involve a 
contradiction. There may easily be a greater quantity of 
any particular commodity than is desired by those who 
have the ability to purchase, and it is abstractedly conceive 
able that this might be the case with all commodities. The 
error is in not perceiving that though all who have an 
equivalent to give, might be fully provided with every con- 
sumable article which they desire, the fact that they go on 
adding to the production proves that this is not actually the 
ease. Assume the most favourable hypothesis for the pur- 



EXCESS OF SUPPLY. 109 

pose, that of a limited community, every member of which 
possesses as much of necessaries and of all known luxuries 
as he desires : and since it is not conceivable that persons 
whose wants were completely satisfied would labour and 
economize to obtain what they did not desire, suppose that 
a foreigner arrives, and produces an additional quantity of 
something of which there was already enough. Here, it 
will be said, is over-production : true, I reply ; over-produc- 
tion of that particular article : the community wanted no 
more of that, but it wanted something. The old inhabit- 
ants, indeed, wanted nothing ; but did not the foreigner him- 
self want something ? When he produced the superfluous 
article, was he labouring without a motive ? He has pro- 
duced, but the wrong thing instead of the right. He want- 
ed, perhaps, food, and has produced watches, with which 
everybody was sufficiently supplied. The new comer 
brought with him into the country a demand for commod- 
ities, equal to all that he could produce by his industry, and 
it was his business to see that the supply he brought should 
be suitable to that demand. If he could not produce some- 
thing capable of exciting a new want or desire in the com- 
munity, for the satisfaction of which some one would grow 
more food and give it to him in exchange, he had the alter- 
native of growing food for himself ; either on fresh land, if 
there was any unoccupied, or as a tenant, or partner,, or 
servant, of some former occupier, willing to be partially re- 
lieved from labour. He has produced a thing not wanted, 
instead of what was wanted ; and he himself, perhaps, is 
not the kind of producer who is wanted ; but there is no 
over-production ; production is not excessive, but merely ill 
assorted. "We saw before, that whoever brings additional 
commodities to the market, brings an additional power of 
purchase ; we now see that he brings also an additional de- 
sire to consume ; since if he had not that desire, he would 
not have troubled himself to produce. Neither of the ele- 
ments of demand, therefore, can be wanting, when there is 
an additional supply ; though it is perfectly possible that 



110 



BOOK III. CHAPTER XIV. §4. 



the demand may be for one thing, and the supply may un- 
fortunately consist of another. 

Driven to his last retreat, an opponent may perhaps al- 
lege, that there are persons who produce and accumulate 
from mere habit ; not because they have any object in 
growing richer, or desire to add in any respect to their con- 
sumption, but from vis inertice. They continue producing 
because the machine is ready mounted, and save and re-in- 
vest their savings because they have nothing on which 
they care to expend them. I grant that this is possible, 
and in some few instances probably happens ; but these do 
not in the slightest degree affect our conclusion. For, what 
do these persons do with their savings ? They invest- them 
productively ; that is, expend them in employing labour. 
In other words, having a purchasing power belonging to 
them, more than they know what to do with, they make 
over the surplus of it for the general benefit of the labouring 
class. Now, will that class also not know what to do with 
:.t ? Are we to suppose that they too have their wants per- 
fectly satisfied, and go on labouring from mere habit ? Un- 
til this is the case, until the working classes have also 
reached the point of satiety— there will be no want of de- 
mand for the produce of capital, however rapidly it may ac- 
cumulate : since, if there is nothing else for it to do, it can 
always find employment in producing the necessaries or lux- 
uries of the labouring class. And when they too had no 
further desire for necessaries and luxuries, they would take 
the benefit of any further increase of wages by diminishing 
their work ; so that the over-production which then for the 
first time would be possible in idea, could not even then take 
place in fact, for want of labourers. Thus, in whatever 
manner the question is looked at, even though we go to the 
extreme verge of possibility to invent a supposition favour- 
able to it, the theory of general over-production implies an 
absurdity. 

§ 4. What then is it by which men who have reflected 



EXCESS OF SUPPLY. HI 

much on economical phenomena, and have even contributed 
to throw new light upon them by original speculations, 
have been led to embrace so irrational a doctrine ? I con- 
ceive them to have been deceived by a mistaken interpreta- 
tion of certain mercantile facts. They imagined that the 
possibility of a general over-supply of commodities was 
proved by experience. They believed that they saw this 
phenomenon in certain conditions of the markets, the true 
explanation of which is totally different. 

I have already described the state of the markets for 
commodities which accompanies what is termed a commer- 
cial crisis. At such times there is really an excess of all 
commodities above the money demand : in other words, 
there is an under-supply of money. From the sudden anni- 
hilation of a great mass of credit, every one dislikes to part 
with ready money, and many are anxious to procure it at 
any sacrifice. Almost everybody therefore is a seller, and 
there are scarcely any buyers : so that there may really be, 
though only while the crisis lasts, an extreme depression of 
general prices, from what may be indiscriminately called a 
glut of commodities or a dearth of money. But it is a great 
error to suppose, with Sismondi, that a commercial crisis is 
the effect of a general excess of production. It is simply 
the consequence of an excess of speculative purchases. It is 
not a gradual advent of low prices, but a sudden recoil from 
prices extravagantly high : its immediate cause is a contrac- 
tion of credit, and the remedy is, not a diminution of sup- 
ply, but the restoration of confidence. It is also evident 
that this temporary derangement of markets is an evil only 
because it is temporary. The fall being solely of money 
prices, if prices did not rise again no dealer would lose, 
since the smaller price would be worth as much to him as 
the larger price was before. In no matter does this phe- 
nomenon answer to the description which these celebrated 
economists have given of the evil of over-production. That 
permanent decline in the circumstances of producers, for 
want of markets, which those writers contemplate, is a con- 



112 BOOK III. CHAPTER XIV. §4. 

ception to which the nature of a commercial crisis gives no 
support. 

The other phenomenon from which the notion of a gen- 
eral excess of wealth and superfluity of accumulation seems 
to derive countenance, is one of a more permanent nature, 
namely, the fall of profits and interest which naturally takes 
place with the progress of population and production. The 
cause of this decline of profit is the increased cost of main- 
taining labour, which results from an increase of population 
and of the demand for food, outstripping the advance of 
agricultural improvement. This important feature in the 
economical progress of nations will receive full considera- 
tion and discussion in the succeeding Book.* It is obvious- 
ly a totally different thing from a want of market for com- 
modities, though often confounded with it in the complaints 
of the producing and trading classes. The true interpreta- 
tion of the modern or present state of industrial economy, is, 
that there is hardly any amount of business which may not 
be done, if people will be content to do it on small profits j 
and this, all active and intelligent persons in business per- 
fectly well know : but even those who comply .with the neces- 
sities of their time, grumble at what they comply with, and 
wish that there were less capital, or, as they express it, less 
competition, in order that there might be greater profits. 
Low profits, however, are a different thing from deficiency 
of demand ; and the production and accumulation which 
merely reduce profits, cannot be called excess of supply or 
of production. What the phenomenon really is, and its 
effects and necessary limits, will be seen when we treat of 
that express subject. 

I know not of any economical facts, except the two 1 
have specified, which can have given occasion to the opin- 
ion that a general over-production of commodities ever pre- 
sented itself in actual experience. I am convinced that 
there is no fact in commercial affairs, wmich, in order to its 
explanation, stands in need of that chimerical supposition. 

* Infra, book iv. chap. iv. 



EXCESS OF SUPPLY. 113 

The point is fundamental ; any difference of opinion on 
it involves radically different conceptions of Political Econ- 
omy, especially in its practical aspect. On the one view, 
we have only to consider how a sufficient production may 
be combined with the best possible distribution, but on the 
other there is a third thing to be considered — how a market 
can be created for produce, or how production can be lim- 
ited to the capabilities of the market. Besides, a theory so 
essentially self-contradictory cannot intrude itself without 
carrying confusion into the very heart of the subject, and 
making it impossible even to conceive with any distinctness 
many of the more complicated economical workings of so- 
ciety. This error has been, I conceive, fatal to the systems, 
as systems, of the three distinguished economists to whom I 
before referred, Malthus, Chalmers, and Sismondi ; all of 
whom have admirably conceived and explained several of 
the elementary theorems of political economy, but this fatal 
misconception has spread itself like a veil between them 
and the more difficult portions of the subject, not suffering 
one ray of light to penetrate. Still more is the same con- 
fused idea constantly crossing and bewildering the specula- 
tions of minds inferior to theirs. It is but justice to two 
eminent names, to call attention to the fact, that the merit 
of having placed this most important point in its true light, 
belongs principally, on the Continent, to the judicious J. B. 
Say, and in this country to Mr. Mill ; who (besides the con- 
clusive exposition which he gave of the subject in his Ele- 
ments of Political Economy) had set forth the correct doc- 
trine with great force and clearness in an early pamphlet, 
called forth by a temporary controversy, and entitled, 
" Commerce Defended ; " the first of his writings which at- 
tained any celebrity, and which he prized more as having 
been his first introduction to the friendship of David Ricar- 
do the most valued and most intimate friendship of his life. 



47 



CHAPTER XV. 

OF A MEASURE OF VALUE. 

§ 1. There has been much discussion among political 
economists respecting a Measure of Yalue. An importance 
has been attached to the subject, greater than it deserved, 
and what has been written respecting it has contributed not 
a little to the reproach of logomachy, which is brought, 
with much exaggeration but not altogether without ground, 
against the speculations of political economists. It is neces- 
sary however to touch upon the subject, if only to show how 
little there is to be said on it. 

A Measure of Yalue, in the ordinary sense of the word 
measure, would mean, something, by comparison with which 
we may ascertain what is the value of any other thing. 
When we consider farther, that value itself is relative, 
and that two things are necessary to constitute it, indepen- 
dently of the third thing which is to measure it ; we may 
define a Measure of Value to be something, by comparing 
with which any two other things, we may infer their value 
in relation to one another. 

In this sense, any commodity will serve as a measure of 
value at a given time and place ; since we can always infer 
the proportion in which things exchange for one another, 
when we know the proportion in which each exchanges for 
any third thing. To serve as a convenient measure of value 
is one of the functions of the commodity selected as a me- 
dium of exchange. It is in that commodity that the values 
of all other things are habitually estimated. We say that 



MEASURE OF VALUE. 115 

one thing is worth 21., anolfier 31. ; and it is then known 
without express statement, that one is worth two-thirds of 
the other, or that the things exchange for one another in 
the proportion of 2 to 3. Money is a complete measure of 
their value. 

But the desideratum sought by political economists is 
not a measure of the value of things at the same time and 
place, but a measure of the value of the same thing at dif- 
ferent times and places : something by comparison with 
which it may be known whether any given thing is of 
greater or less value now than a century ago, or in this 
country than in America or China. And for this also, money, 
or any other commodity, will serve quite as well as at the 
same time and place, provided we can obtain the same 
data ; provided we are able to compare with the measure 
not one commodity only, but the two or more which are 
necessary to the idea of value. If wheat is now 40s. the 
quarter, and a fat sheep the same, and if in the time of 
Henry the Second wheat was 20*., and a sheep 10*., we 
know that a quarter of wheat was then worth two sheep, 
and is now only worth one, and that the value therefore of 
a sheep, estimated in wheat, is twice as great as it was then ; 
quite independently of the value of money at the two peri- 
ods, either in relation to those two articles (in respect to both 
of which we suppose it to have fallen), or to other commod- 
ities, in respect to which we need not make any supposition. 

What seems to be desired, however, by writers on the 
subject, is some means of ascertaining the value of a com- 
modity by merely comparing it with the measure, without 
referring it specially to any other given commodity. They 
would wish to be able, from the mere fact that wheat is 
now 40s. the quarter, and was formerly 20s., to decide 
whether wheat has varied in its value, and in what degree, 
without selecting a second commodity, such as a sheep, to 
compare it with ; because they are not desirous of knowing 
how much wheat has varied in value relatively to sheep, 
but how much it has varied relatively to things in general. 

I 



116 BOOK III. CHAPTER XV. §2. 

The first obstacle arises from the necessary indefiniteness 
of the idea of general exchange value — value in relation not 
to some one commodity, but to commodities at large. Even 
if we knew exactly how much a quarter of wheat would 
have purchased at the earlier period, of every marketable 
article considered separately, and that it will now purchase 
more of some things and less of others, we should often 
find it impossible to say whether it had risen or fallen in 
relation to things in general. How much more impossible 
when we only know how it has varied in relation to the 
measure. To enable the money price of a thing at two dif- 
ferent periods to measure the quantity of things in general 
which it will exchange for, the same sum of money must 
correspond at both periods to the same quantity of things in 
general, that is, money must always have the same exchange 
ralue, the same general purchasing power. Now, not only 
is this not true of money, or of any other commodity, but 
we cannot even suppose any state of circumstances in which 
it would be true. 

§ 2. A measure of exchange value, therefore, being 
impossible, writers have formed a notion of something, 
under the name of a measure of value, which would be 
more properly termed a measure of cost of production. 
They have imagined a commodity invariably produced by 
the same quantity of labour ; to which supposition it is 
necessary to add, that the fixed capital employed in the pro- 
duction must bear always the same proportion to the wages 
of the immediate labour, and must be always of the same 
durability : in short, the same capital must be advanced for 
the same" length of time, so that the element of value which 
consists of profits, as well as that which consists of wages, 
may be unchangeable. We should then have a commodity 
always produced under one and the same combination of all 
the circumstances which affect permanent value. Such a 
commodity will be by no means constant in its exchange 
value ; for (even without reckoning the temporary fluctua 



MEASURE OF VALUE. 117 

tions arising from supply and demand) its exchange value 

would be altered by every change in the circumstances of 

production of the things against which it was exchanged. 

\ But if there existed such a commodity, we should derive 

I this advantage from it, that whenever any other thing 

; varied permanently in relation to it, we should know that 
the cause of variation was not in it, but in the other thing. 
It would thus be fitted to serve as a measure, not indeed of 
the value of other things, but of their cost of production. 
If a commodity acquired a greater permanent purchasing 
power in relation to the invariable commodity, its cost of 
production must have become greater ; and in the contrary 
case, less. This measure of cost, is what political economists 
have generally meant by a measure of value. 
> But a measure of cost, though perfectly conceivable, can 
no more exist in fact, than a measure of exchange value. 
There is no commodity which is invariable in its cost of 
production. Gold and silver are the least variable, but 
even these are liable to chaDges in their cost of production 
from the exhaustion of old sources of supply, the discovery 
of new, and improvements in the mode of working. If we 
attempt to ascertain the changes in the cost of production 
of any commodity from the changes in its money price, the 
conclusion will require to be corrected by the best allow- 
ance we can make for the intermediate changes in the cost 
of the production of money itself. 

Adam Smith fancied that there were two commodities 
peculiarly fitted to serve as a measure of value : corn, and 
labour. Of com, he said that although its value fluctuates 
much from year to year, it does not vary greatly from cen- 
tury to century. This we now know to be an error : corn 
. tends to rise in cost of production with every increase of 
f population, and to fall with every improvement in agricul- 
ture, either in the country itself, or in any foreign country 
from which it draws a portion of its supplies. The sup- 
posed constancy of the cost of the production of corn depends 
on the maintenance of a complete equipoise between these 



llg BOOK III. CHAPTER XV. §2. 

antagonizing forces, an equipoise which, if ever realized, 
can only be accidental. With respect to labour as a meas- 
ure of value, the language of Adam Smith is not uniform. 
He sometimes speaks of it as a good measure only for short 
periods, saying that the value of labour (or wages) does not 
vary much from year to year, though it does from genera- 
tion to generation. On other occasions he speaks as if la- 
bour were intrinsically the most proper measure of value, 
on the ground that one day's ordinary muscular exertion of 
one man, may be looked upon as always, to him, the same 
amount of effort or sacrifice. But this proposition, whether 
in itself admissible or not, discards the idea of exchange 
value altogether, substituting a totally different idea, more 
analogous to value in use. If a day's labour will purchase 
in America twice as much of ordinary consumable articles 
as in England, it seems a vain subtlety to insist on saying 
that labour is of the same value in both countries, and that 
it is the value of the other things, which is different. La- 
bour, in this case, may be correctly said to be twice as val- 
uable, both in the market and to the labourer himself, in 
America as in England. 

If the object were to obtain an approximate measure by 
which to estimate value in use, perhaps nothing better could 
be chosen than one day's subsistence of an average man, 
reckoned in the ordinary food consumed by the class of un- 
skilled labourers. If in America a pound of maize flour will 
support a labouring man for a day, a thing might be deemed 
more or less valuable in proportion to the number of pounds 
of maize flour it exchanged for. If one thing, either by it- 
self or by what it would purchase, could maintain a labour- 
ing man for a day, and another could maintain him for a 
week, there would be some reason in saying that the one 
was worth, for ordinary human uses, seven times as much 
as the other. But this would not measure the worth of the 
thing to its possessor for his own purposes, which might be 
greater to any amount, though it could not be less, than the 
worth of the food which the thing would purchase. 



MEASURE OF VALUE. 119 

The idea of a Measure of Yalue must not be confounded 
with the idea of the regulator, or determining principle, of 
value. When it is said by Ricardo and others, that the 
"""value of a thing is regulated by quantity of labour, they do 
not mean the quantity of labour for which the thing will 
exchange, but the quantity required for producing it. This, 
they mean to affirm, determines its value ; causes it to be of 
the value it is, and of no other. But when Adam Smith 
and Malthus say that labour is a measure of value, they do 
not mean the labour by which the thing was or can be 
made, but the quantity of labour which it will exchange 
for, or purchase ; in other words, the value of the thing, es- 
timated in labour. And they do not mean that this regulates 
the general exchange value of the thing, or has any effect 
in determining what that value shall be, but only ascertains 
what it is, and whether and how much it varies from time 
to time and from place to place. To confound these two 
ideas, would be much the same thing as to overlook the 
distinction between the thermometer and the fire. 



CHAPTER XVI. 

OF SOME PECULIAR CASES OF VALUE. 

§ 1. The general laws of value, in all the more impor- 
tant cases of the interchange of commodites in the same 
country, have now been investigated. We examined, first, 
the case of monopoly, in which the value is determined by 
either a natural or an artificial limitation of quantity, that 
is, by demand and supply : secondly, the case of free com- 
petition, when the article can be produced in indefinite 
quantity at the same cost ; in which case the permanent 
value is determined by the cost of production, and only the 
fluctuations by supply and demand : thirdly, a mixed case, 
that of the articles which can be produced in indefinite 
quantity, but not at the same cost ; in which case the per- 
manent value is determined by the greatest cost which it is 
necessary to incur in order to obtain the required supply. 
And lastly, we have found that money itself is a commodity 
of the third class ; that its value, in a state of freedom, is 
governed by the same laws as the values of other commod- 
ities of its class ; and that prices, therefore, follow the same 
laws as values. 

From this it appears that demand and supply govern the 
fluctuations of values and prices in all cases, and the perma- 
nent values and prices of all things of which the supply is 
determined by any agency other than that of free competi- 
tion : but that, under the regime of competition, things are, 
on the average, exchanged for each other at such values, and 
sold at such prices, as afford equal expectation of advantage 



SOME PECULIAR CASES OF VALUE 121 

to all classes of producers ; which can only be when thing* 
exchange for one another in the ratio of their cost of pre 
ductioD. 

It is now, however, necessary to take notice of certain 
cases, to which, from their peculiar nature, this law of ex- 
change value is inapplicable. 

It sometimes happens that two different cominoditie* 
have what may be termed a joint cost of production. They 
are both products of the same operation, or set of operations, 
and the outlay is incurred for the sake of both together, not 
part for one and part for the other. The same outlay would 
have to be incurred for either of the two, if the other were 
not wanted or used at all. There are not a few instances 
of commodities thus associated in their production. For 
example, coke and coal-gas are both produced from the same 
material, and by the same operation. In a more partial 
sense, mutton and wool are an example : beef, hides, and 
tallow : calves and dairy produce : chickens and eggs. Cost 
of production can have nothing to do with deciding the 
value of the associated commodities relatively to each other. 
It only decides their joint value. The gas and the coke to- 
gether have to repay the expenses of their production, with 
the ordinary profit. To do this, a given quantity of gas, to- 
gether with the coke which is the residuum of its manufac- 
ture, must exchange for other things in the ratio of their 
joint cost of production. But how much of the remunera- 
tion of the producer shall be derived from the coke, and 
how much from the gas, remains to be decided. Cost of 
production does not determine their prices, but the sum of 
their prices. A principle is wanting to apportion the ex- 
penses of production between the two. 

Since cost of production here fails us, we must revert to 
a law of value anterior to cost of production, and more 
fundamental, the law of demand and supply. The law is, 
that the demand for a commodity varies with its value, and 
that the value adjusts itself so that the demand shall be 
equal to the supply. This supplies the principle of reparti- 
tion which we are in quest of. 



122 BOOK III. CHAPTER XVI. §1. 

Suppose that a certain quantity of gas is produced and 
sold at a certain price, and that the residuum of coke is 
offered at a price which, together with that of the gas, re- 
pays the expenses with the ordinary rate of profit. Sup- 
pose, too, that at the price put upon the gas and coke re- 
spectively, the whole of the gas finds an easy market, 
without either surplus or deficiency, but that purchasers 
cannot be found for all the coke corresponding to it. The 
coke will be offered at a lower price in order to force a 
market. But this lower price, together with the price of the 
gas, will not be remunerating : the manufacture, as a whole, 
will not pay its expenses with the ordinary profit, and will 
not, on these terms, continue to be carried on. The gas, 
therefore, must be sold at a higher price, to make up for the 
deficiency on the coke. The demand consequently contract- 
ing, the production will be somewhat reduced ; and prices 
will become stationary when, by the joint effect of the rise 
of gas and the fall of coke, so much less of the first is sold, 
and so much more of the second, that there is now a market 
for all the coke which results from the existing extent of the 
gas manufacture. 

Or suppose the reverse case ; that more coke is wanted 
at the present prices, than can be supplied by the operations 
required by the existing demand for gas. Coke, being now 
in deficiency, will rise in price. The whole operation will 
yield more than the usual rate of profit, and additional cap- 
ital will be attracted to the manufacture. The unsatisfied 
demand for coke will be supplied ; but this cannot be done 
without increasing the supply of gas too ; and as the exist- 
ing demand was fully supplied already, an increased quan- 
tity can only find a market by lowering the price. The 
result will be that the two together will yield the return 
required by their joint cost of production, but that more of 
this return than before will be furnished by the coke, and 
less by the gas. Equilibrium will be attained when the de- 
mand for each article fits so well with the demand for the 
other, that the quantity required of each is exactly as much 



SOME PECULIAR CASES OF VALUE. 123 

as is generated in producing the quantity required of the 
other. If there is any surplus or deficiency on either side ; 
if there is a demand for coke, and not a demand for all the 
gas produced along with it, or vice versa ; the values and 
prices of the two things will so readjust themselves that 
both shall find a market. 

When, therefore, two or more commodities have a joint 
cost of production, their natural values relatively to each 
other are those which will create a demand for each, in the 
ratio of the quantities in which they are sent forth by the 
productive process. This theorem is not in itself of any 
great importance : but the illustration it affords of the law 
of demand, and of the mode in which, when cost of produc- 
tion fails to be applicable, the other principle steps in to 
supply the vacancy, is worthy of particular attention, as we 
shall find in the next chapter but one that something very 
similar takes place in cases of much greater moment. 

§ 2. Another case of value which merits attention, is 
that of the different kinds of agricultural produce. This is 
rather a more complex question than the last, and requires 
that attention should be paid to a greater number of in- 
fluencing circumstances. 

The case would present nothing peculiar, if different 
agricultural products were either grown indiscriminately 
and with equal advantage on the same soils, or wholly on 
different soils. The difficulty arises from two things : first, 
that most soils are fitter for one kind of produce than an- 
other, without being absolutely unfit for any ; and secondly, 
the rotation of crops. 

For simplicity, we will confine our supposition to two 
kinds of agricultural produce ; for instance, wheat and oats. 
If all soils were equally adapted for wheat and for oats, both 
would be grown indiscriminately on all soils, and their rela- 
tive cost of production, being the same everywhere, would 
govern their relative value. If the same labour which 
grows three quarters of wheat on any given soil, would al 



124 BOOK III. CHAPTER XVI. §2. 

ways grow on that soil five quarters of oats, the three and 
the five quarters would be of the same value. If, again, 
wheat and oats could not be grown on the same soil at all, 
the value of each would be determined by its peculiar cost 
of production on the least favourable of the soils adapted for 
it which the existing demand required a recourse to. The 
fact, however, is that both wheat and oats can be grown on 
almost any soil which is capable of producing either : but 
some soils, such as the stiff clays, are better adapted for 
wheat, while others (the light sandy soils) are more suitable 
for oats. There might be some soils which would yield, to 
the same quantity of labour, only four quarters of oats to 
three of wheat ; others perhaps less than three of wheat to 
five quarters of oats. Among these diversities, what deter- 
mines the relative value of the two things ? 

It is evident that each grain will be cultivated in pref- 
erence, on the soils which are better adapted for it than for 
the other ; and if the demand is supplied from these alone, 
the values of the two grains will have no reference to one 
another. But when the demand for both is such as to re- 
quire that each should be grown not only on the soils pecu- 
liarly fitted for it, but on the medium soils which, without 
being specifically adapted to either, are about equally suited 
for both, the cost of production on those medium soils will 
determine the relative value of the two grains ; while the 
rent of the soils specifically adapted to each, will be regu- 
lated by their productive power, considered with reference 
to that one alone to which they are peculiarly applicable. 
Thus far the question presents no difficulty, to any one to 
whom the general principles of value are familiar. 

It may happen, however, that the demand for one of the 
two, as for example wheat, may so outstrip the demand for 
the other, as not only to occupy the soils specially suited for 
wheat, but to engross entirely those equally suitable to both, 
and even encroach upon those which are better adapted to 
oats. To create an inducement for this unequal apportion- 
ment of the cultivation, wheat must be relatively dearer, 



SOME PECULIAR CASES OF VALUE. 125 

and oats cheaper, than according to the cost of their produc- 
tion on the medium land. Their relative value must be in 
proportion to the cost on that quality of land, whatever it 
may be, on which the comparative demand for the two 
grains requires that both of them should be grown. If, 
from the state of the demand, the two cultivations meet on 
land more favourable to one than to the other, that one will 
be cheaper and the other dearer, in relation to each other 
and to things in general, than if the proportional demand 
were as we at first supposed. 

Here, then, we obtain a fresh illustration, in a somewhat 
different manner, of the operation of demand, not as an 
occasional disturber of value, but as a permanent regulator 
of it, conjoined with, or supplementary to, cost of pro- 
duction. 

The case of rotation of crops does not require separate 
analysis, being a case of joint cost of production, like that 
of gas and coke. If it were the practice to grow white and 
green crops on all lands in alternate years, the one being 
necessary as much for the sake of the other as for its own 
sake ; the farmer would derive his remuneration for two 
years' expenses from one white and one green crop, and the 
prices of the two would so adjust themselves as to create a 
demand which would carry off an equal breadth of white 
and of green crops. 

There would be little difficulty in finding other anoma- 
lous cases of value, which it might be a useful exercise to re- 
solve : but it is neither desirable nor possible, in a work like 
the present, to enter more into details than is necessary for 
the elucidation of principles. I now therefore proceed to the 
only part of the general theory of exchange which has not 
yet been touched upon, that of International Exchanges, or 
to speak more generally, exchanges between distant places. 



CHAPTER xyn. 

OF INTERNATIONAL TRADE. 

§ 1. The causes which occasion a commodity to be 
brought from a distance, instead of being produced, as con- 
venience would seem to dictate, as near as possible to the 
market where it is to be sold for consumption, are usually 
conceived in a rather superficial manner. Some things it is 
physically impossible to produce, except in particular cir- 
cumstances of heat, soil, water, or atmosphere. But there 
are many things which, though they could be produced at 
home without difficulty, and in any quantity, are yet im- 
ported from a distance. The explanation which would be 
popularly given of this would be, that it is cheaper to im- 
port than to produce them : and this is the true reason. 
But this reason itself requires that a reason be given for it. 
Of two things produced in the same place, if one is cheaper 
than the other, the reason is t that it can be produced with 
less labour and capital, or, in a word, at less cost. Is this 
also the reason as between things produced in different 
places ? Are things never imported but from places where 
they can be produced with less labour (or less of the other 
element of cost, time) than in the place to which they are 
brought ? Does the law, that permanent value is propor- 
tioned to cost of production, hold good between commodities 
produced in distant places, as it does between those pro- 
duced in adjacent places ? 

We shall find that it does not. A thing may sometimes 
be sold cheapest, by being produced in some other place 



INTERNATIONAL TRADE. 12 T 

than that at which it can be produced with the smallest 
amount of labour and abstinence. England might import 
corn from Poland and pay for it in cloth, even though Eng- 
land had a decided advantage over Poland in the produc- 
tion of both the one and the other. England might send cot- 
tons to Portugal in exchange for wine, although Portugal 
might be able to produce cottons with a less amount of 
labour and capital than England could. 

This could not happen between adjacent places. If 
the north bank of the Thames possessed an advantage over 
the south bank in the production of shoes, no shoes would 
be produced on the south side ; the shoemakers would re- 
move themselves and their capitals to the north bank, or 
would have established themselves there originally ; for, 
being competitors in the same market with those on the 
north side, they could not compensate themselves for their 
disadvantage at the expense of the consumer : the amount 
of it would fall entirely on their profits ; and they would 
not long content themselves with a smaller profit, when, by 
simply crossing a river, they could increase it. But between 
distant places, and especially between different countries, 
profits may continue different ; because persons do not usu- 
ally remove themselves or their capitals to a distant place, 
without a very strong motive. If capital removed to remote 
parts of the world as readily, and for as small an induce- 
ment, as it moves to another quarter of the same town ; if 
people would transport their manufactories to America or 
China whenever they could save a small percentage in their 
expenses by it ; profits would be alike (or equivalent) all over 
the world, and all things would be produced in the places 
where the same labour and capital would produce them in 
greatest quantity and of best quality. A tendency may, 
even now, be observed towards such a state of things ; capi- 
tal is becoming more and more cosmopolitan ; there is so 
much greater similarity of manners and institutions than 
formerly, and so much less alienation of feeling, among the 
more civilized countries, that both population and capital 



128 BOOK III. CHAPTER XVII. §2. 

now move from one of those countries to another on much 
less temptation than heretofore. But there are still extra- 
ordinary differences, both of wages and of profits, between 
different parts of the world. It needs bat a small motive to 
transplant capital, or even persons, from Warwickshire to 
Yorkshire ; but a much greater to make them remove to 
India, the colonies, or Ireland. To France, Germany, or 
Switzerland, capital moves perhaps almost as readily as to 
the colonies ; the differences of language and government 
being scarcely so great a hindrance as climate and distance. 
To countries still barbarous, or, like Kussia or Turkey, only 
beginning to be civilized, capital will not migrate, unless 
under the inducement of a very great extra profit. 

Between all distant places therefore in some degree, but 
especially between different countries (whether under the 
same supreme government or not,) there may exist great in- 
equalities in the return to labour and capital, without caus- 
ing them to mo^e from one place to the other in such quan- 
tity as to level those inequalities. The capital belonging to 
a country will, to a great extent, remain in the country, 
even if there be no mode of employing it in which it would 
not be more productive elsewhere. Yet even a country 
thus circumstanced might, and probably would, carry on 
trade with other countries. It would export articles of 
some sort, even to places which could make them with less 
labour than itself; because those countries, supposing them 
to have an advantage over it in all productions, would have 
a greater advantage in some things than in others, and 
would find it their interest to import the articles in which 
their advantage was smallest, that they might employ more 
of their labour and capital on those in which it was 
greatest. 

§ 2. As I have said elsewhere* after Bicardo (the 
thinker who has done most towards clearing up this sub- 

* Essays on some Unsettled Questions of Political Economy, Essay I. 






INTERNATIONAL TRADE. 129 

ject)* " it is not a difference in the absolute cost of produc- 
tion, which determines the interchange, but a difference in 
the comparative cost. It may be to our advantage to pro- 
cure iron from Sweden in exchange for cottons, even although 
the mines of England as well as her manufactories should 
be more productive than those of Sweden ; for if we have 
an advantage of one-half in cottons, and only an advantage 
of a quarter in iron, and could sell our cottons to Sweden at 
the price which Sweden must pay for them if she produced 
them herself, we should obtain our iron with an advantage 
of one-half, as well as our cottons. We may often, by trad- 
ing with foreigners, obtain their commodities at a smaller 
expense of labour and capital than they cost to the foreign- 
ers themselves. The bargain is still advantageous to the 
foreigner, because the commodity which he receives in ex- 
change, though it has cost us less, would have cost him 
more." 

To illustrate the cases in which interchange of commod- 
ities will not, and those in which it will, take place between 
two countries, Mr. Mill, in his Elements of Political Econ- 
omy,f makes the supposition, that Poland has an advantage 
over England in the production both of cloth and of corn. 
He first supposes the advantage to be of equal amount in 
both commodities ; the cloth and the corn, each of which 
required 100 days labour in Poland, requiring each 150 
days labour in England. " It would follow, that the cloth 
of 150 days labour in England, if sent to Poland, would be 
equal to the cloth of 100 days labour in Poland ; if ex- 
changed for corn, therefore, it would exchange for the corn 
of only 100 days labour. But the corn of 100 days labour 
in Poland, was supposed to be the same quantity with that 

* I at one time believed Mr. Ricardo to have been the sole author of the 
doctrine now universally received by political economists, on the nature and 
measure of the benefit which a country derives from foreign trade. But Colonel 
Torrens, by the republication of one of his early writings, " The Economists 
Refuted," has established at least a joint claim with Mr. Ricardo to the origina- 
tion of the doctrine, and an exclusive one to its earliest publication, 
f Third ed. p. 120. 
48 



130 BOOK III. CHAPTER XVII. §2. 

of 150 days labour in England. With 150 days labour in 
cloth, therefore, England would only get as much corn in 
Poland as she could raise with 150 days labour at home ; 
and she would, in importing it, have the cost of carriage 
besides. In these circumstances no exchange would take 
place." In this case the comparative costs of the two arti- 
cles in England and in Poland were supposed to be the same, 
though the absolute costs were different ; on which supposi- 
tion we see that there would be no labour saved to either 
country by confining its industry to one of the two produc- 
tions, and importing the other. 

It is otherwise when the comparative, and not merely 
the absolute costs of the two articles are different in the two 
countries. " If," continues the same author, " while the 
cloth produced with 100 days labour in Poland was pro- 
duced with 150 days labour in England, the corn which 
was produced in Poland with 100 days labour could not be 
produced in England with less than 200 days labour ; an 
adequate motive to exchange would immediately arise. 
"With a quantity of cloth which England produced with 150 
days labour, she would be able to purchase as much corn in 
Poland as was there produced with 100 days labour ; but 
the quantity which was there produced with 100 days la- 
bour, would be as great as the quantity produced in Eng- 
land with 200 days labour." By importing corn, therefore, 
from Poland, and paying for it with cloth, England would 
obtain for 150 days labour what would otherwise cost her 
200 ; being a saving of 50 days labour on each repetition 
of the transaction : and not merely a saving to England, but 
a saving absolutely ; for it is not obtained at the expense of 
Poland, who, with corn that costs her 100 days labour, has 
purchased cloth which, if produced at home, would have 
cost her the same. Poland, therefore, on this supposition, 
loses nothing ; but also she derives no advantage from the 
trade, the imported cloth costing her as much as if it were 
made at home. To enable Poland to gain anything by the 
interchange, something must be abated from the gain of 






INTERNATIONAL TRADE. 131 

England : the corn produced in Poland by 100 days labour, 
must be able to purchase from England more cloth than 
Poland could produce by that amount of labour ; more 
therefore than England could produce by 150 days labour, 
England thus obtaining the corn which would have cost her 
200 days, at a cost exceeding 150, though short of 200. 
England therefore no longer gains the whole of the labour 
which is saved to the two jointly by trading with one 
another. 

§ 3. From this exposition we perceive in what consists 
the benefit of international exchange, or, in other words, 
foreign commerce. Setting aside its enabling countries to 
obtain commodities which they could not themselves pro- 
duce at all ; its advantage consists in a more efficient em- 
ployment of the productive forces of the world. If two 
countries which traded together attempted, as far as was 
physically possible, to produce for themselves what they 
now import from one another, the labour and capital of the 
two countries would not be so productive, the two together 
would not obtain from their industry so great a quantity of 
commodities, as when each employs itself in producing, 
both for itself and for the other, the things in which its la- 
bour is relatively most efficient. The addition thus made 
to the produce of the two combined, constitutes the advan- 
tage of the trade. It is possible that one of the two coun- 
tries may be altogether inferior to the other in productive 
capacities, and that its labour and capital could be employed 
to greatest advantage by being removed bodily to the other. 
The labour and capital which have been sunk in rendering 
Holland habitable, would have produced a much greater 
return if transported to America or Ireland. The produce 
of the whole world would be greater, or the labour less, than 
it is, if everything were produced where there is the great- 
est absolute facility for its production. But nations do not, 
at least in modern times, emigrate en masse / and while the 
labour and capital of a country remain in the country, they 



Ig2 BOOK III. CHAPTER XVII. §4. 

are most beneficially employed in producing for foreign 
markets as well as for its own, the things in which it lies 
under the least disadvantage, if there be none in which it 
possesses an advantage. 

§ 4. Before proceeding further, let us contrast this view 
of the benefits of international commerce with other theories 
which have prevailed, and which to a certain extent still 
prevail, on the same subject. 

According to the doctrine now stated, the only direct 
advantage of foreign commerce consists in the imports. A 
country obtains things which it either could not have pro- 
duced at all, or which it must have produced at a greater 
expense of capital and labour than the cost of the things 
which it exports to pay for them. It thus obtains a more 
ample supply of the commodities it wants, for the same la- 
bour and capital ; or the same supply, for less labour and 
capital, leaving the surplus disposable to produce other 
things. The vulgar theory disregards this benefit and 
deems the advantage of commerce to reside in the exports : 
as if not what a country obtains, but what it parts with, by 
its foreign trade, was supposed to constitute the gain to it. 
An extended market for its produce — an abundant consump- 
tion for its goods — a vent for its surplus — are the phrases 
by which it has been customary to designate the uses and 
recommendations of commerce with foreign countries. This 
notion is intelligible, when we consider that the authors and 
leaders of opinion on mercantile questions have always hith- 
erto been the selling class. It is in truth a surviving relic 
of the Mercantile Theory, according to which, money being 
the only wealth, selling, or in other words, exchanging 
goods for money was (to countries without mines of their 
own) the only way of growing rich — and importation of 
goods, that is to say, parting with money, was so much sub- 
tracted from the benefit. 

The notion that money alone is wealth, has been long 
defunct, but it has left many of its progeny behind it ; and 



INTERNATIONAL TRADE. 133 

even its destroyer Adam Smith, retained some opinions 
which it is impossible to trace to any other origin. Adam 
Smith's theory of the benefit of foreign trade, was that it 
afforded an outlet for the surplus produce of a country, and 
enabled a portion of the capital of the country to replace it- 
self with a profit. These expressions suggest ideas incon- 
sistent with a clear conception of the phenomena. The ex- 
pression, surplus produce, seems to imply that a country is 
under some kind of necessity of producing the corn or cloth 
which it exports ; so that the portion which it does not 
itself consume, if not wanted and consumed elsewhere, 
would either be produced in sheer waste, or if it were not 
produced, the corresponding portion of capital would remain 
idle, and the mass of productions in the country would be 
diminished by so much. Either of these suppositions would 
be entirely erroneous. The country produces an exportable 
article in excess of its own wants, from no inherent neces- 
sity, but as the cheapest mode of supplying itself with other 
things. If prevented from exporting this surplus, it would 
cease to produce it, and would no longer import anything, 
being unable to give an equivalent ; but the labour and 
capital which had been employed in producing with a 
view to exportation, would find employment in producing 
those desirable objects which were previously brought from 
abroad : or, if some of them could not be produced, in pro- 
ducing substitutes for them. These articles would of course 
be produced at a greater cost than that of the things with 
which they had previously been purchased from foreign 
countries. But the value and price of the articles would 
rise in proportion ; and the capital would just as much be 
replaced, with the ordinary profit, from the returns, as it 
was when employed in producing for the foreign market. 
The only losers (after the temporary inconvenience of the 
change) would be the consumers of the heretofore imported 
articles ; who would be obliged either to do without them, 
consuming in lieu of them something which they did not 
like as well, or to pay a higher price for them than before. 



134 BOOK III. CHAPTER XVII. §5. 

There is much misconception in the common notion of 
what commerce does for a country. When commerce is 
spoken of as a source of national wealth, the imagination 
fixes itself upon the large fortunes acquired by merchants, 
rather t than upon the saving of price to consumers. But 
the gains of merchants, when they enjoy no exclusive privi- 
lege, are no greater than the profits obtained by the em- 
ployment of capital in the country itself. If it be said that 
the capital now employed in foreign trade could not find 
employment in supplying the home market, I might reply, 
that this is the fallacy of general over-production, discussed 
in a former chapter ; but the thing is in this particular case 
too evident, to require an appeal to any general theory. 
We not only see that the capital of the merchant would find 
employment, but we see what employment. There would 
be employment created, equal to that which would be taken 
away. Exportation ceasing, importation to an equal value 
would cease also, and all that part of the income of the 
country which had been expended in imported commodities, 
would be ready to expend itself on the same things pro- 
duced at home, or on others instead of them. Commerce is 
virtually a mode of cheapening production ; and in all such 
cases the consumer is the person ultimately benefited ; the 
dealer, in the end, is sure to get his profit, whether the 
buyer obtains much or little for his money. This is said 
without prejudice to the effect (already touched upon, and 
to be hereafter fully discussed) which the cheapening of com- 
modities may have in raising profits ; in the case when the 
commodity cheapened, being one of those consumed by la- 
bourers, enters into the cost of labour, by which the rate of 
profits is determined. 

§ 5. Such, then, is the direct economical advantage of 
foreign trade. But there are, besides, indirect effects, which 
must be counted as benefits of a high order. One is, the 
tendency of every extension of the market to improve the 
processes of production. A country which produces for 



INTERNATIONAL TRADE. 135 

a larger market than its own, can introduce a more extended 
division of labour, can make greater use of machinery, and 
is more likely to make inventions and improvements in the 
processes of production. Whatever causes a greater quan- 
tity of anything to be produced in the same place, tends to 
the general increase of the productive powers of the world.* 
There is another consideration, principally applicable to an 
early stage of industrial advancement. A people may be 
in a quiescent, indolent, uncultivated state, with all their 
tastes either fully satisfied or entirely undeveloped, and they 
may fail to put forth the whole of their productive energies 
for want of any sufficient object of desire. The opening of 
a foreign trade, by making them acquainted with new ob- 
jects, or tempting them by the easier acquisition of things 
which they had not previously thought attainable, some- 
times works a sort of industrial revolution in a country 
whose resources were previously undeveloped for want of 
energy and ambition in the people: inducing those who 
were satisfied with scanty comforts and little work, to work 
harder for the gratification of their new tastes, and even to 
save, and accumulate capital, for the still more complete 
satisfaction of those tastes at a future time. 

But the economical advantages of commerce are sur- 
passed in importance by those of its effects which are intel- 
lectual and moral. It is hardly possible to overrate the 
value, in the present low state of human improvement, of 
placing human beings in contact with persons dissimilar to 
themselves, and with modes of thought and action unlike 
those with which they are familiar. Commerce is now, 
what war once was, the principal source of this contact. 
Commercial adventurers from more advanced countries 
have generally been the first civilizers of barbarians. And 
commerce is the purpose of the far greater part of the com- 
munication which takes place between civilized nations. 
Such communication has always been, and is peculiarly 
in the present age, one of the primary sources of progress. 

* Vide supra, book i. chap. ix. § 1. 



136 B00K HI. CHAPTER XVII. §5. 

To human beings, who, as hitherto educated, can scarcely 
cultivate even a good quality without running it into a 
fault, it is indispensable to be perpetually comparing their 
own notions and customs with the experience and example 
of persons in different circumstances from themselves : and 
there is no nation which does not need to borrow from 
others, not merely particular arts or practices, but essential 
points of character in which its own type is inferior. Final- 
ly, commerce first taught nations to see with good will the 
wealth and prosperity of one another. Before, the patriot, 
unless sufficiently advanced in culture to feel the world his 
country, wished all countries weak, poor, and ill-governed, 
but his own : he now sees in their wealth and progress a 
direct source of wealth and progress to his own country. 
It is commerce which is rapidly rendering war obsolete, by 
strengthening and multiplying the personal interests which 
are in natural opposition to it. And it may be said without 
exaggeration that the great extent and rapid increase of in- 
ternational trade, in being the principal guarantee of the 
peace of the world, is the great permanent security for the 
uninterrupted progress of the ideas, the institutions, and the 
character of the human race. 



CHAPTER XVIII. 

OF INTERNATIONAL VALUES. 

§ 1. The values of commodities produced at the same 
place, or in places sufficiently adjacent for capital to move 
freely between tliem — let us say, for simplicity, of commod- 
ities produced in the same country — depend (temporary 
fluctuations apart) upon their cost of production. But the 
value of a commodity brought from a distant place, especi- 
ally from a foreign country, does not depend on its cost of 
production in the place from whence it comes. On what, 
then, does it depend ? The value of a thing in any place, 
depends on the cost of its acquisition in that place ; which 
in the case of an imported article, means the cost of produc- 
tion of the thing which is exported to pay for it. 

Since all trade is in reality barter, money being a mere 
instrument for exchanging things against one another, we 
will, for simplicity, begin by supposing the international 
trade to be in form, what it always is in reality, an actual 
trucking of one commodity against another. As far as we 
have hitherto proceeded, we have found all the laws of in- 
terchange to be essentially the same, whether money is used 
or not ; money never governing, but always obeying, those 
general laws. 

If, then, England imports wine from Spain, giving for 
every pipe of wine a bale of cloth, the exchange value of a 
pipe of wine in England will not depend upon what the 
production of the wine may have cost in Spain, but upon 
what the production of the cloth has cost in England. 



138 BOOK III. CHAPTER XVIII. §1. 

Though the wine may have cost in Spain the equivalent of 
only ten days labour, yet, if the cloth costs in England 
twenty days labour, the wine, when brought to England, 
will exchange for the produce of twenty days English la- 
bour, plus the cost of carriage ; including the usual profit 
on the importer's capital during the time it is locked up, 
and withheld from other employment. 

The value, then, in any country, of a foreign commod- 
ity, depends on the quantity of home produce which must 
be given to the foreign country in exchange for it. In other 
words, the values of foreign commodities depend on the 
terms of international exchange. What, then, do these de- 
pend upon ? What is it, which, in the case supposed, causes 
a pipe of wine from Spain to be exchanged with England 
for exactly that quantity of cloth ? We have seen that it is 
not their cost of production. If the cloth and the wine were 
both made in Spain, they would exchange at their cost of 
production in Spain ; if they were both made in England, 
they would exchange at their cost of production in Eng- 
land : but all the cloth being made in England, and all the 
wine in Spain, they are in circumstances to which we have 
already determined that the law of cost of production is not 
applicable. We must accordingly, as we have done before 
in a similar embarrassment, fall back upon an antecedent 
law, that of supply and demand : and in this we shall again 
find the solution of our difficulty. 

I have discussed this question in a separate Essay, al- 
ready once referred to ; and a quotation of part of the expo- 
sition then given, will be the best introduction to my pres- 
ent view of the subject. I must give notice that we are now 
in the region of the most complicated questions which polit- 
ical economy affords ; that the subject is one which cannot 
possibly be made elementary ; and that a more continuous 
effort of attention than has yet been required, will be neces- 
sary to follow the series of deductions. The thread, how- 
ever, which we are about to take in hand, is in itself very 
simple and manageable ; the only difficulty is in following it 



INTERNATIONAL VALUES. 139 

through the windings and entanglements of complex inter- 
national transactions. 

§ 2. " When the trade is established between the two 
countries, the two commodities will exchange for each other 
at the same rate of interchange in both countries — bating 
the cost of carriage, of which, for the present, it will be 
more convenient to omit the consideration. Supposing, 
therefore, for the sake of argument, that the carriage of the 
commodities from one country to the other could be effected 
without labour and without cost, no sooner would the trade 
be opened than the value of the two commodities, estimated 
in each other, would come to a level in both countries. 

" Suppose that 10 yards of broadcloth cost in England 
as much labour as 15 yards of linen, and in Germany as 
much as 20." In common with most of my predecessors, I 
find it advisable, in these intricate investigations, to give 
distinctness and fixity to the conception by numerical exam- 
ples. These examples must sometimes, as in the present 
case, be purely supposititious. I should have preferred real 
ones ; but all that is essential is that the numbers should be 
such as admit of being easily followed through the subse- 
quent combinations into which they enter. 

This supposition then being made, it would be the in- 
terest of England to import linen from Germany, and. of 
Germany to import cloth from England. "When each 
country produced both commodities for itself, 10 yards of 
cloth exchanged for 15 yards of linen in England, and for 
20 in Germany. They will now exchange for the same 
number of yards of linen in both. For what number ? If 
for 15 yards, England will be just as she was, and Germany 
will gain all. If for 20 yards, Germany will be as before, 
and England will derive the whole of the benefit. If for any 
number intermediate between 15 and 20, the advantage 
will be shared between the two countries. If, for example, 
10 yards of cloth exchange for 18 of linen, England will 
gain an advantage of 3 yards on every 15, Germany will 



140 BOOK III. CHAPTER XVIII. §2. 

save 2 out of every 20. The problem is, what are the 
causes which determine the proportion in which the cloth 
of England and the linen of Germany will exchange for 
each other. 

" As exchange value, in this case as in every other, is 
proverbially fluctuating, it does not matter what we suppose 
it to be when we begin : we shall soon see whether there 
be any fixed point about which it oscillates, which it has a 
tendency always to approach to, and to remain at. Let us 
suppose, then, that by the effect of what Adam Smith calls 
the higgling of the market, 10 yards of cloth, in both coun- 
tries, exchange for IT yards of linen. 

" The demand for a commodity, that is, the quantity of 
it which can find a purchaser, varies, as we have before re- 
marked, according to the price. In Germany the price of 
10 yards of cloth is now IT yards of linen, or whatever 
quantity of money is equivalent in Germany to IT yards of 
linen. Now, that being the price, there is some particular 
number of yards of cloth, which will be in demand, or will 
find purchasers, at that price. There is some given quan- 
tity of cloth, more than which could not be disposed of at 
that price ; less than which, at that price, would not fully 
satisfy the demand. Let us suppose this quantity to be 
1000 times 10 yards. 

" Let us now turn our attention to England. There 
the price of IT yards of linen is 10 yards of cloth, or what- 
ever quantity of money js equivalent in England to 10 yards 
of cloth. There is some particular number of yards of linen 
which, at that price, will exactly satisfy the demand, and 
no more. Let us suppose that this number is 1000 times 
IT yards. 

" As IT yards of linen are to 10 yards of cloth, so are 
1000 times IT yards to 1000 times 10 yards. At the exist- 
ing exchange value, the linen which England requires will 
exactly pay for the quantity of cloth which, on the same 
terms of interchange, Germany requires. The demand on 
each side is precisely sufficient to carry off the supply on 



INTERNATIONAL VALUES. 141 

the other. The conditions required by the principle of de- 
mand and supply are fulfilled, and the two commodities, 
will continue to be interchanged, as we supposed them to 
be, in the ratio of 17 yards of linen for 10 yards of cloth. 

" But our suppositions might have been different. Sup- 
pose that, at the assumed rate of interchange, England had 
been disposed to consume no greater quantity of linen than 
800 times 17 yards : it is evident that, at the rate supposed, 
this would not have sufficed to pay for the 1000 times 10 
yards of cloth which we have supposed Germany to require 
at the assumed value. Germany would be able to procure 
no more than 800 times 10 yards at that price. To procure 
the remaining 200, which she would have no means of doing 
but by bidding higher for them, she would offer more than 17 
yards of linen in exchange for 10 yards of cloth : let us sup- 
pose her to offer 18. At this price, perhaps, England would 
be inclined to purchase a greater quantity of linen. She 
would consume, possibly, at that price, 900 times 18 yards. 
On the other hand, cloth having risen in price, the demand 
of Germany for it would probably have diminished. If, in- 
stead of 1000 times 10 yards, she is now contended with 900 
times 10 yards, these will exactly pay for the 900 times 18 
yards of linen which England is willing to take at the al- 
tered price : the demand on each side will again exactly 
suffice to take off the corresponding supply ; and 10 yards 
for 18 will be the rate at which, in both countries, cloth 
will exchange for linen. 

" The converse of all this would have happened, if, in- 
stead of 800 times 17 yards, we had supposed that England, 
at the rate of 10 for 17, would have taken 1200 times 17 
yards of linen. In this case, it is England whose demand is 
not fully supplied ; it is England who by bidding for more 
linen, will alter the rate of interchange to her own disadvan- 
tage ; and 10 yards of cloth will fall, in both countries, be- 
low the value of 17 yards of linen. By this fall of cloth, or 
what is the same thing, this rise of linen, the demand of 
Germany for cloth will increase, and the demand of Eng- 



142 BOOK III. CHAPTER XVIII. §2. 

land for linen will diminish, till the rate of interchange has 
so adjusted itself that the cloth and the linen will exactly 
pay for one another ; and when once this point is attained, 
values will remain without further alteration. 

" It may be considered, therefore, as established, that 
when two countries trade together in two commodities, the 
exchange value of these commodities relatively to each 
other will adjust itself to the inclinations and circumstances 
of the consumers on both sides, in such manner that the 
quantities required by each country, of the articles which it 
imports from its neighbour, shall be exactly sufficient to pay 
for one another. As the inclinations and circumstances of 
consumers cannot be reduced to any rule, so neither can the 
proportions in which the two commodities will be inter- 
changed. We know that the limits within which the varia- 
tion is confined, are the ratio between their costs of produc- 
tion in the one country, and the ratio between their costs of 
production in the other. Ten yards of cloth cannot exchange 
for more than 20 yards of linen, nor for less than 15. But 
they may exchange for any intermediate number. The ra- 
tios, therefore, in which the advantage of the trade may be 
divided between the two nations, are various. The circum- 
stances on which the proportionate share of each country more 
remotely depends, admit only of a very general indication. 

" It is even possible to conceive an extreme case, in 
which the whole of the advantage resulting from the inter- 
change would be reaped by one party, the other country gain- 
ing nothing at all. There is no absurdity in the hypothesis 
that, of some given commodity, a certain quantity is all 
that is wanted at any price ; and that, when that quantity 
is obtained, no fall in the exchange value would induce 
other consumers to come forward, or those who are already 
supplied, to take more. Let us suppose that this is the case 
in Germany with cloth. Before her trade with England 
commenced, when 10 yards of cloth cost her as much labour 
as 20 yards of linen, she nevertheless consumed as much 
cloth as she wanted under any circumstances, and, if she 






INTERNATIONAL VALUES. 143 

could obtain it at the rate of 10 yards of cloth for 15 
of linen, she would not consume more. Let this fixed 
quantity be 1000 times 10 yards. At the rate, however, of 
10 for 20, England would want more linen than would be 
equivalent to this quantity of cloth. She would, conse- 
quently, offer a higher value for linen ; or, what is the same 
thing, she would offer her cloth at a cheaper rate. But, as 
by no lowering of the value could she prevail on Germany 
to take a greater quantity of cloth, there would be no limit 
to the rise of linen or fall of cloth, until the demand of 
England for linen was reduced by the rise of its value, to 
the quantity which 1000 times 10 yards of cloth would pur- 
chase. It might be, that to produce this diminution of the 
demand a less fall would not suffice than that which would 
make 10 yards of cloth exchange for 15 of linen. Germany 
would then gain the whole of the advantage, and England 
would be exactly as she was before the trade commenced. 
It would be for the interest, however, of Germany herself to 
keep her linen a little below the value at which it could be 
produced in England, in order to keep herself from being 
supplanted by the home producer. England, therefore, 
would always benefit in some degree by the existence of 
the trade, though it might be a very trifling one." 

In this statement, I conceive, is contained the first ele- 
mentary principle of International Values. I have, as is 
indispensable in such abstract and hypothetical cases, sup- 
posed the circumstances to be much less complex than they 
really are : in the first place, by suppressing the cost of 
carriage : next, by supposing that there are only two coun- 
tries trading together ; and lastly, that they trade only in 
two commodities. To render the exposition of the principle 
complete, it is necessary to restore the various circumstances 
thus temporarily left out to simplify the argument. Those 
who are accustomed to any kind of scientific investigation 
will probably see, without formal proof, that the introduc- 
tion of these circumstances cannot alter the theory of the 
subject. Trade among any number of countries, and in any 



144: BOOK III. CHAPTER XVIII. §8. 

number of commodities, must take place on the same essen- 
tial principles as trade between two countries and in two 
commodities. . Introducing a greater number of agents pre- 
cisely similar, cannot change the law of their action, no 
more than putting additional weights into the two scales 
of a balance alters the law of gravitation. It alters nothing 
but the numerical results. For more complete satisfaction, 
however, we will enter into the complex cases with the 
same particularity with which we have stated the simpler 
one. 

§ 3. First, let us introduce the element of cost of car- 
riage. The chief difference will then be, that the cloth and 
the linen will no longer exchange for each other at precisely 
the same rate in both countries. Linen, having to be car- 
ried to England, will be dearer there by its cost of carriage ; 
and cloth will be dearer in Germany by the cost of carrying 
it from England. Linen, estimated in cloth, will be dearer 
in England than in Germany, by the cost of carriage of both 
articles : and so will cloth in Germany, estimated in linen. 
Suppose that the cost of carriage of each is equivalent to 
one yard of linen ; and suppose that, if they could have been 
carried without cost, the terms of interchange would have 
been 10 yards of cloth for 17 of linen. It may seem at first 
that each country will pay its own cost of carriage ; that is, 
the carriage of the article it imports ; that in Germany 10 
yards of cloth will exchange for 18 of linen, namely, the 
original 17, and 1 to cover the cost of carriage of the cloth ; 
while in England, 10 yards of cloth will only purchase 16 
of linen, 1 yard being deducted for the cost of carriage of 
the linen. This, however, cannot be affirmed with certain- 
ty ; it will only be true, if the linen which the English con- 
sumers would take at the price of 10 for 16, exactly pays for 
the cloth which the German consumers would take at 10 
for 18. The values, whatever they are, must establish this 
equilibrium. No absolute rule, therefore, can be laid down 
for the division of the cost, no more than for the division of 



,i INTERNATIONAL VALUES. 145 

the advantage : and it does not follow that in whatever 
ratio the one is divided, the other will be divided in the 
same. It is impossible to say, if the cost of carriage could 
be annihilated, whether the producing or the importing 
country would be most benefited. This would depend on 
the play of international demand. 

Cost of carriage has one effect more. But for it, every 
commodity would (if trade be supposed free) be either regu- 
larly imported or regularly exported. A country would 
make nothing for itself which it did not also make for other 
countries. But in consequence of cost of carriage there are 
many things, especially bulky articles, which every, or al- 
most every country produces within itself. After exporting 
the things in which it can employ itself most advantageous- 
ly, and importing those in which it is under the greatest 
disadvantage, there are many lying between, of which the 
relative cost of production in that and in other countries dif- 
fers so little, that the cost of carriage would absorb more 
than the whole saving in cost of production which would be 
obtained by importing one and exporting another. This is 
the case with numerous commodities of common consump- 
tion ; including the coarser qualities of many articles of food 
and manufacture, of which the finer kinds are the subject 
of extensive international traffic. 

§ 4. Let us now introduce a greater number of commod- 
ities than the two we have hitherto supposed. Let cloth and 
linen, however, be still the articles of which the compara- 
tive cost of production in England and in Germany differ 
the most ; so that if they were confined to two commodities, 
these would be the two which it would be most their inter- 
est to exchange. We will now again omit cost of carriage, 
which, having been shown not to affect the essentials of the 
question, does but embarrass unnecessarily the statement 
of it. Let us suppose, then, that the demand of England for 
^inen is either so much greater than that of Germany for 
cloth, or so much more extensible by cheapness, that if 
49 



146 BOOK III. CHAPTER XVIII. §4. 

England had no commodity but cloth which Germany 
would take, the demand of England would force up the 
terms of interchange to 10 yards of cloth for only 16 of 
linen, so that England would gain only the difference be- 
tween 15 and 16, Germany the difference between 16 and 
20. But let us now suppose that England has also another 
commodity, say iron, which is in demand in Germany, and 
that the quantity of iron which is of equal value in England 
with 10 yards of cloth, (let us call this quantity a hundred 
weight) will, if produced in Germany, cost as much labour 
as 18 yards of linen, so that if offered by England for 17, it 
will undersell the German producer. In these circum- 
stances, linen will not be forced up to the rate of 16 yards 
for 10 of cloth, but will stop, suppose at 17 ; for although, at 
that rate of interchange, Germany will not take enough 
cloth to pay for all the linen required by England, she will 
take iron for the remainder, and it is the same thing to 
England whether she gives a hundred weight of iron or 10 
yards of cloth, both being made at the same cost. If we 
now superadd coals or cottons on the side of England, and 
wine, or corn, or timber, on the side of Germany, it will 
make no difference in the principle. The exports of each 
country must exactly pay for the imports ; meaning now 
the aggregate exports and imports, not those of particular 
commodities taken singly. The produce of fifty days Eng- 
lish labour, whether in cloth, coals, iron, or any other ex- 
ports, will exchange for the produce of forty, or fifty, or 
sixty days German labour, in linen, wine, corn, or timber, 
according to the international demand. There is some pro- 
portion at which the demand of the two countries for each 
other's products will exactly correspond ; so that the things 
supplied by England to Germany will be completely paid 
for, and no more, by those supplied by Germany to Eng- 
land. This accordingly will be the ratio in which the prod- 
uce of English and the produce of German labour will ex- 
change for one another. 

If, therefore, it be asked what country draws to itself the 



INTERNATIONAL VALUES. 147 

greatest share of the advantage of any trade it carries on, 
the answer is, the country for whose productions there is in 
other countries the greatest demand, and a demand the 
most susceptible of increase from additional cheapness. In 
so far as the productions of any country possess this proper- 
ty, the country obtains all foreign commodities at less cost. 
It gets its imports cheaper, the greater the intensity of the 
demand in foreign countries for its exports. It also gets its 
imports cheaper, the less the extent and intensity of its own 
demand for them. The market is cheapest to those whose 
demand is small. A country which desires few foreign pro- 
ductions, and only a limited quantity of them, while its own 
commodities are in great request in foreign countries, will 
obtain its limited imports at extremely small cost, that is, 
in exchange for the produce of a very small quantity of its 
labour and capital. 

Lastly, having introduced more than the original two 
commodities into the hypothesis, let us also introduce more 
than the original two countries. After the demand of Eng- 
land for the linen of Germany has raised the rate of inter- 
change to 10 yards of cloth for 16 cf linen, suppose a trade 
opened between England and some other country which 
also exports linen. And let us suppose that if England had 
no trade but with this third country, the play of interna- 
tional demand would enable her to obtain from it, for 10 
yards of cloth or its equivalent, 17 yards of linen. She evi- 
dently would not go on buying linen from Germany at the 
former rate : Germany would be undersold, and must con- 
sent to give 17 yards, like the other country. In this case, 
the circumstances of production and of demand in the third 
country are supposed to be in themselves more advantageous 
to England than the circumstances of Germany ; but this 
supposition is not necessary : we might suppose that if the 
trade with Germany did not exist, England would be 
obliged to give to the other country the same advantageous 
terms which she gives to Germany ; 10 yards of cloth for 
16, or even less than 16, of linen. Even so, the opening of 



148 • BOOK III. CHAPTER XVIII. §4. 

the third country makes a great difference in favour of Eng- 
land. There is now a double market for English exports, 
while the demand of England for linen is only what it was 
before. This necessarily obtains for England more advan- 
tageous terms of interchange. The two countries, requiring 
much more of her produce than was required by either 
alone, must, in order to obtain it, force an increased demand 
for their exports, by offering them at a lower value. 

It deserves notice, that this effect in favour of England 
from the opening of another market for her exports, will 
equally be produced even though the country from which 
the demand comes should have nothing to sell which Eng- 
land is willing to take. Suppose that the third country, 
though requiring cloth or iron from England, produces no 
linen, nor any other article which is in demand there. She 
however produces exportable articles, or she would have no 
means of paying for imports : her exports, though not suit- 
able to the English consumer, can find a market somewhere. 
As we are only supposing three countries, we must assume 
her to find this market in Germany, and to pay for what she 
imports from England by orders on her German customers. 
Germany, therefore, besides having to pay for her own im- 
ports, now owes a debt to England on account of the third 
country, and the means for both purposes must be derived 
from her exportable produce. She must therefore tender that 
produce to England on terms sufficiently favourable to force 
a demand equivalent to this double debt. Everything will 
take place precisely as if the third country had bought Ger- 
man produce with her own goods, and offered that produce 
to England in exchange for hers. There is an increased 
demand for English goods, for which German goods have 
to furnish the payment ; and this can only be done by for- 
cing an increased demand for them in England, that is, by 
lowering their value. Thus an increase of demand for a coun- 
try's exports in any foreign country, enables her to obtain 
more cheaply even those imports which she procures from 
other quarters. And conversely, an increase of her own 



INTERNATIONAL VALUES. 1 19 

demand for any foreign commodity compels her, cceteris 
pa/ribu8, to pay dearer for all foreign commodities. 

The law which we have now illustrated, may be appro- 
priately named, the Equation of International Demand. It 
may be concisely stated as follows. The produce of a coun- 
try exchanges for the produce of other countries, at such 
values as are required in order that the whole of her exports 
may exactly pay for the whole of her imports. This law 
of International Values is but an extension of the more 
general law of Value, which we called the Equation of Sup- 
ply and Demand.* We have seen that the value of a com- 
modity always so adjusts itself as to bring the demand to 
the exact level of the supply. But all trade, either between 
nations or individuals, is an interchange of commodities, 
in which the things that they respectively have to sell, con- 
stitute also their means of purchase: the supply brought by 
the one constitutes his demand for what is brought by the 
other. So that supply and demand are but another expres- 
sion for reciprocal demand : and to say that value will ad- 
just itself so as to equalize demand with supply, is in fact 
to say that it will adjust itself so as to equalize the demand 
on one side with the demand on the other. 

§ 5. To trace the consequences of this law of Interna- 
tional Values through their wide ramifications, would occu- 
py more space than can be here devoted to such a purpose. 
But there is one of its applications which I will notice, as 
being in itself not unimportant, as bearing on the question 
which will occupy us in the next chapter, and especially as 
conducing to the more full and clear understanding of the 
law itself. 

We have seen that the value at which a country pur- 
shases a foreign commodity, does not conform to the cost 
of production in the country from which the commodity 
comes. Suppose now a change in that cost of production ; 
an improvement, for example, in the process of manufacture 

* Supra, book iii. chap. ii. §4. 



150 BOOK HI. CHAPTER XVm. §5. 

Will the benefit of the improvement be fully participated in 
by other countries ? Will the commodity be sold as much 
cheaper to foreigners, as it is produced cheaper at home ? 
This question, and the considerations which must be entered 
into in order to resolve it, are well adapted to try the worth 
of the theory. 

Let us first suppose, that the improvement is of a nature 
to create a new branch of export : to make foreigners resort 
to the country for a commodity which they had previously 
produced at home. On this supposition, the foreign demand 
for the productions of the country is increased ; which ne- 
cessarily alters the international values to its advantage, and 
to the disadvantage of foreign countries, who, therefore, 
though they participate in the benefit of the new product, 
must purchase that benefit by paying for all the other pro- 
ductions of the country at a dearer rate than before. How 
much dearer, will depend on the degree necessary for re- 
establishing, under these new conditions, the Equation of 
International Demand. These consequences follow in a 
very obvious manner from the law of international values, 
and I shall not occupy space in illustrating them, but shall 
pass to the more frequent case, of an improvement which 
does not create a new article of export, but lowers the cost 
of production of something which the country already ex- 
ported. 

It being advantageous, in discussions of this complicated 
nature, to employ definite numerical amounts, we shall re- 
turn to our original example. Ten yards of cloth, if pro- 
duced in Germany, would require the same amount of la- 
bour and capital as twenty yards of linen ; but, by the play 
of international demand, they can be obtained from England 
for seventeen. Suppose now, that by a mechanical improve- 
ment made in Germany, and not capable of being trans- 
ferred to England, the same quantity of labour and capital 
which produced twenty yards of linen, is enabled to pro- 
duce thirty. Linen falls one-third in value in the German 
market, as compared with other commodities produced in 






INTERNATIONAL VALUES. 151 

Germany. Will it also fall one-third as compared with 
English cloth, thus giving to England, in common with 
Germany, the full benefit of the improvement ? Or (ought 
we not rather to say), since the cost to England of obtaining 
linen was not regulated by the cost to Germany of produc- 
ing it, and since England, accordingly, did not get the entire 
benefit even of the twenty yards which Germany could 
have given for ten yards of cloth, but only obtained seven- 
teen — why should she now obtain more, merely because this 
theoretical limit is removed ten degrees further off? 

It is evident that in the outset, the improvement will 
lower the value of linen in Germany, in relation to all other 
commodities in the German market, including, among the 
rest, even the imported commodity, cloth. If 10 yards of 
cloth previously exchanged for 17 yards of linen, they will 
now exchange for half as much more, or 25^ yards. But 
whether they will continue to do so, will depend on the effect 
which this increased cheapness of linen produces on the in- 
ternational demand. The demand for linen in England 
could scarcely fail to be increased. But it might be in- 
creased either in proportion to the cheapness, or in a greater 
proportion than the cheapness, or in a less proportion. 

If the demand was increased in the same proportion with 
the cheapness, England would take as many times 25£ yards 
of linen, as the number of times IT yards which she took 
previously. She would expend in linen exactly as much of 
cloth, or of the equivalents of cloth, as much in short of the 
collective income of her people, as she did before. Ger- 
many, on her part, would probably require, at that rate of 
interchange, the same quantity of cloth as before, because it 
would in reality cost her exactly as much ; 25f yards of 
linen being now of the same value in her market, as 17 
yards were before. In this case, therefore, 10 yards of cloth 
for 25^ of linen is the rate of interchange which under these 
new conditions would restore the equation of international 
demand ; and England would obtain linen one-third cheaper 
than before, being the same advantage as was obtained by 
Germany. 



152 BOOK III. CHAPTER XVIII. §5. 

It might happen, however, that this great cheapening 
of linen would increase the demand for it in England in a 
greater ratio than the increase of cheapness ; and that if she 
before wanted 1000 times IT yards, she would now require 
more than 1000 times 25-| yards to satisfy her demand. If 
so, the equation of international demand cannot establish 
itself at that rate of interchange ; to pay for the linen Eng- 
land must offer cloth on more advantageous terms : say, for 
example, 10 yards for 21 of linen ; so that England will not 
have the full benefit of the improvement in the production 
of linen, while Germany, in addition to that benefit, will 
also pay less for cloth. But again, it is possible that Eng- 
land might not desire to increase her consumption of linen 
in even so great a proportion as that of the increased cheap- 
ness ; she might not desire so great a quantity as 1000 times 
25-g- yards : and in that case Germany must force a demand, 
by offering more than 25-| yards of linen for 10 of cloth ; 
linen will be cheapened in England in a still greater degree 
than in Germany ; while Germany will obtain cloth on 
more unfavourable terms, and at a higher exchange value 
than before. 

After what has already been said, it is not necessary to 
particularize the manner in which these results might be 
modified by introducing into the hypothesis other countries 
and other commodities. There is a further circumstance by 
which they may also be modified. In the case supposed, 
the consumers of Germany have had a part of their incomes 
set at liberty by the increased cheapness of linen, which 
they may indeed expend in increasing their consumption 
of that article, but which they may, likewise, expend in 
other articles, and among others, in cloth or other imported 
commodities. This would be an additional element in the 
international demand, and would modify more or less the 
terms of interchange. 

Of the three possible varieties in the influence of cheap- 
ness on demand, which is the more probable — that the de- 
mand would be increased more than the cheapness, as much 






INTERNATIONAL VALUES. 153 

as the cheapness, or less than the cheapness ? This depends 
on the nature of the particular commodity, and on the tastes 
of purchasers. When the commodity is one in general re- 
quest, and the fall of its price brings it within the reach of 
a much larger class of incomes than before, the demand is 
often increased in a greater ratio than the fall of price, and 
a larger sum of money is on the whole expended in the ar- 
ticle. Such was the case with coffee, when its price was 
lowered by successive reductions of taxation ; and such 
would probably be the case with sugar, wine, and a large 
class of commodities which, though not necessaries, are 
largely consumed, and in which many consumers indulge 
when the articles are cheap and economize when they arc 
dear. But it more frequently happens that when a com- 
modity falls in price, less money is spent in it than before : 
a greater quantity is consumed, but not so great a value. 
The consumer who saves money by the cheapness of the ar- 
ticle, will be likely to expend part of the saving in increas- 
ing his consumption of other things : and unless the low 
price attracts a large class of new purchasers who were 
either not consumers of the article at all, or only in small 
quantity and occasionally, a less aggregate sum will be ex- 
pended on it. Speaking generally, therefore, the third of 
our three cases is the most probable : and an improvement 
in an exportable article is likely to be as beneficial (if. not 
more beneficial) to foreign countries, as to the country 
where the article is produced. 

§ 6. Thus far had the theory of international values 
been earned in the first and second editions of this work. 
But intelligent criticisms, and subsequent further investiga- 
tion, have shown that the doctrine stated in the preceding 
pages, though correct as far as it goes, is not yet the com- 
plete theory of the subject matter. 

It has been shown that the exports and imports between 
the two countries (or, if we suppose more than two, between 
each country and the world) must in the aggregate pay for 



154 BOOK III. CHAPTER XVIII. §6. 

each other, and must therefore be exchanged for one another 
at such values as will be compatible with the equation of 
international demand. That this, however, does not furnish 
the complete law of the phenomenon, appears from the fol- 
lowing consideration : that several different rates of inter- 
national value may all equally fulfil the conditions of this 
law. 

The supposition was, that England could produce 10 
yards of cloth with the same labour as 15 of linen, and Ger- 
many with the same labour as 20 of linen ; that a trade was 
opened between the two countries ; that England thence- 
forth confined her production to cloth, and Germany to 
linen ; and that, if 10 yards of cloth should thenceforth ex- 
change for 17 of linen, England and Germany would exact- 
ly supply each other's demand: that, for instance, if Eng- 
land wanted at that price 17,000 yards of linen, Germany 
would want exactly the 10,000 yards of cloth, which, at 
that price, England would be required to give for the linen. 
Under these suppositions it appeared, that 10 cloth for 17 
linen, would be, in point of fact, the international values. 

But it is quite possible that some other rate, such as 10 
cloth for 18 linen, might also fulfil the conditions of the 
equation of international demand. Suppose that at this last 
rate, England would want more linen than at the rate of 10 
for 17, but not in the ratio of the cheapness ; that she would 
not want the 18,000 which she could now buy with 10,000 
yards of cloth, but would be content with 17,500, for which 
she would pay (at the new rate of 10 for 18) 9722 yards of 
cloth. Germany, again, having to pay dearer for cloth 
than when it could be bought at 10 for 17, would probably 
reduce her consumption to an amount below 10,000 yards, 
perhaps to the very same number, 9722. Under these con- 
ditions the Equation of International Demand would still 
exist. Thus, the rate of 10 for 17, and that of 10 for 18, 
would equally satisfy the Equation of Demand : and many 
other rates of interchange might satisfy it in like manner. 
It is conceivable that the conditions might be equally satis- 






INTERNATIONAL VALUES. 155 

fied by every numerical rate which could be supposed. 
There is still therefore a portion of indeterminateness in the 
rate at which the international values would adjust them- 
selves ; showing that the whole of the influencing circum- 
stances cannot yet have been taken into the account. 

§ 7. It will be found that to supply this deficiency, we 
must take into consideration not only, as we have already 
done, the quantities demanded in each country, of the im- 
ported commodities ; but also the extent of the means of 
supplying that demand, which are set at liberty in each 
country by the change in the direction of its industry. 

To illustrate this point it will be necessary to choose 
more convenient numbers than those which we have hither- 
to employed. Let it be supposed that in England 100 yards 
of cloth, previously to the trade, exchanged for 100 of linen, 
but that in Germany 100 of cloth exchanged for 200 of 
linen. When the trade was opened, England would supply 
cloth to Germany, Germany linen to England, at an ex- 
change value which would depend partly on the element al- 
ready discussed, viz. the comparative degree in which, in 
the two countries, increased cheapness operates in increasing 
the demand ; and partly on some other element not yet 
taken into account. In order to isolate this unknown ele- 
ment, it will be necessary to make some definite and invari- 
able supposition in regard to the known element. Let us 
therefore assume, that the influence of cheapness on demand 
conforms to some simple law, common to both countries 
and to both commodities. As the simplest and most conve- 
nient, let us suppose that in both countries any given in- 
crease of cheapness produces an exactly proportional in- 
crease of consumption : or, in other words, that the value 
expended in the commodity, the cost incurred for the sake 
of obtaining it, is always the same, whether that cost affords 
a greater or a smaller quantity of the commodity. 

Let us now suppose that England, previously to the 
trade, required a million of yards of linen, which were 



156 BOOK III. CHAPTER XVIII. §7. 

worth, at the English cost of production, a million yards of 
cloth. By turning all the labour and capital with which 
that linen was produced, to the production of cloth, she 
would produce for exportation a million yards- of cloth. 
Suppose that this is the exact quantity which Germany is 
accustomed to consume. England can dispose of all this 
cloth in Germany at the German price ; she must consent 
indeed to take a little less until she has driven the German 
producer from the market, but as soon as this is effected, 
she can sell her million of cloth for two millions of linen ; 
being the quantity that the German clothiers are enabled to 
make, by transferring their whole labour and capital from 
cloth to linen. Thus England would gain the whole benefit 
of the trade, and Germany nothing. This would be per- 
fectly consistent with the equation of international demand : 
since England (according to the hypothesis in the preceding 
paragraph) now requires two millions of linen (being able 
to get them at the same cost at which she previously ob- 
tained only one), while the prices in Germany not being al- 
tered, Germany requires as before exactly a million of 
cloth, and can obtain it by employing the labour and capi- 
tal set at liberty from the production of cloth, in producing 
the two millions of linen required by England. 

Thus far we have supposed that the additional cloth 
which England could make, by transferring to cloth the 
whole of the capital previously employed in making linen, 
was exactly sufficient to supply the whole of Germany's 
existing demand. But suppose next that it is more than 
sufiicient. Suppose that while England could make with 
her liberated capital a million yards of cloth for exportation, 
the cloth which Germany had heretofore required was 
800,000 yards only, equivalent at the German cost of pro- 
duction to 1,600,000 yards of linen. England therefore 
could not dispose of a whole million of cloth in Germany at 
the German prices. Yet she wants, whether cheap or dear 
(by our supposition), as much linen as can be bought for a 
million of cloth : and since this can only be obtained from 



INTERNATIONAL VALUES. 157 

Germany, or by the more expensive process of production 
at home, the holders of the million of cloth will be forced 
by each other's competition to offer it to Germany on any 
terms (short of the English cost of production) which will 
induce Germany to take the whole. What terms these 
would be, the supposition we have made enables us exactly 
to define. The 800,000 yards of cloth which Germany con- 
sumed, cost her the equivalent of 1,600,000 linen, and that 
invariable cost is what she is willing to expend in cloth, 
whether the quantity it obtains for her be more or less. 
England therefore, to induce Germany to take a million of 
cloth, must offer it for 1,600,000 of linen. The international 
values will thus be 100 cloth for 160 liuen, intermediate be- 
tween the ratio of the costs of production in England and 
that of the costs of production in Germany : and the two 
countries will divide the benefit of the trade, England gain- 
ing in the aggregate 600,000 yards of linen, and Germany 
being richer by 200,000 additional yards of cloth. 

Let us now stretch the last supposition still farther, and 
suppose that the cloth previously consumed by Germany 
was not only less than the million yards which England is 
enabled to furnish by discontinuing her production of linen, 
but less in the full proportion of England's advantage in the 
production, that is, that Germany only required half a mil- 
lion. In this case, by ceasing altogether to produce cloth, 
Germany can add a million, but a million only, to her pro- 
duction of linen, and this million being the equivalent of 
what the half million previously cost her, is all that she can 
be induced by any degree of cheapness to expend in cloth. 
England will be forced by her own competition to give a 
whole million of cloth for this million of linen, just as she 
was forced in the preceding case to give it for 1,600,000. 
But England could have produced at the same cost a mil 
lion yards of linen for herself. England therefore derives, 
in this case, no advantage from the international trade. 
Germany gains the whole ; obtaining a million of cloth in- 
stead of half a million, at what the half million previously 



158 B00K m - CHAPTER XVIII. §7. 

cost her. Germany, in short, is, in this third case, exactly 
in the same situation as England was in the first case ; which 
may easily be verified by reversing the figures. 

As a general result of the three cases, it may be laid 
down as a theorem, that under the supposition we have 
made of a demand exactly in proportion to the cheapness, 
the law of international value will be as follows : — 

The whole of the cloth which England can make with 
the capital previously devoted to linen, will exchange for 
the whole of the linen which Germany can make with the 
capital previously devoted to cloth. 

Or, still more generally, 

The whole of the commodities which the two countries 
can respectively make for exportation, with the labour and 
capital thrown out of employment by importation, will ex- 
change against one another. 

This law, and the three different possibilities arising 
from it in respect to the division of the advantage, may be 
conveniently generalized by means of algebraical symbols, 
as follows : — 

Let the quantity of cloth which England can make with 
the labour and capital withdrawn from the production of 
linen, be = n. 

Let the cloth previously required by Germany (at the 
German cost of production) be = m. 

Then n of cloth will always exchange for exactly 2m of 
linen. 

Consequently if n=m, the whole advantage will be on 
the side of England. 

If n—2m, the whole advantage will be on the side of 
Germany. 

If n be greater than m, but less than 2m, the two coun- 
tries will share the advantage ; England getting 2m of linen 
where she before got only n • Germany getting n of cloth 
where she before got only m. 

It is almost superfluous to observe that the figure 2 
stands where it does, only because it is the figure which ex- 






INTERNATIONAL VALUES. 159 

presses the advantage of Germany over England in linen as 
estimated in cloth, and (what is the same thing) of England 
over Germany in cloth as estimated in linen. If we had 
supposed that in Germany, before the trade, 100 of cloth 
exchanged for 1000 instead of 200 of linen, then n (after the 
trade commenced) would have exchanged for 10m instead of 
2m. If instead of 1000 or 200 we had supposed only 150, 
n would have exchanged for only ^n. If (in fine) the cost 
value of cloth (as estimated in linen) in Germany, exceeds 
the cost value similarly estimated in England, in the ratio 
of p to q, then will n, after the opening of the trade, ex- 
change for -m.* 

* It may be asked, why we have supposed the number n to have as its ex- 
treme limits, m and 2 m (or -m) ? why may not n be less than m, or greater 
than 2m ; and if so, what will be the result ? 

This we shall now examine, and when we do so it will appear that n is 
always, practically speaking, confined within these limits. 

Suppose for example that n is less than m ; or, reverting to our former 
figures, that the million yards of cloth, which England can make, will not satisfy 
the whole of Germany's pre-existing demand ; that demand being (let us sup- 
pose) for 1,200,000 yards. It would then, at first sight, appear that England 
would supply Germany with cloth up to the extent of a million ; that Germany 
would continue to supply herself with the remaining 200,000 by home produc- 
tion : that this portion of the supply would regulate the price of the whole ; that 
England therefore would be able permanently to sell her million of cloth at the 
German cost of production (viz. for two millions of linen) and would gain the 
whole advantage of the trade, Germany being no better off than before. 

That such, however, would not be the practical result, will soon be evident. 
The residuary demand of Germany for 200,000 yards of cloth furnishes a re- 
source to England for purposes of foreign trade of which it is still her interest 
to avail herself; and though she has no more labour and capital which she can 
withdraw from linen for the production of this extra quantity of cloth, there 
must be some other commodities in which Germany has a relative advantage 
over her (though perhaps not so great as in linen) : these she will now import, 
instead of producing, and the labour and capital formerly employed in producing 
them will be transferred to cloth, until the required amount is made up. If this 
transfer just makes up the 200,000 and no more, this augmented n will now be 
equal to m ; England will sell the whole 1,200,000 at the German values; and 
will still gain the whole advantage of the trade. But if the transfer makes up 
more than the 200,000, England will have more cloth than 1,200,000 yards to 
offer ; n will become greater than in, and England must part with enough of the 



IQQ BOOK III. CHAPTER XVIII. §8. 

§ 8. We have now arrived at what seems a law of In- 
ternational Values, of great simplicity and generality. But 
we have done so by setting out from a purely arbitrary hy- 
pothesis respecting the relation between demand and cheap- 
ness. "We have assumed their relation to be fixed, though 
it is essentially variable. We have supposed that every in- 
crease of cheapness produces an exactly proportional exten- 
sion of demand ; in other words, that the same invariable 
value is laid out in a commodity whether it be cheap or 
dear ; and the law which we have investigated holds good 
only on this hypothesis, or some other practically equiva- 
lent to it. Let us now, therefore, combine the two variable 
elements of the question, the variations of each of which we 
have considered separately. Let us suppose the relation 
between demand and cheapness to vary, and to become 
such as would prevent the rule of interchange laid down in 
the last theorem from satisfying the conditions of the Equa- 
tion of International Demand. Let it be supposed, for in- 
stance, that the demand of England for linen is exactly pro- 
portional to the cheapness, but that of Germany for cloth, not 
proportional. To revert to the second of our three cases, the 
case in which England by discontinuing the production of 
linen could produce for exportation a million yards of cloth, 
and Germany by ceasing to produce cloth could produce an 
additional 1,600,000 yards of linen. If the one of these quan- 
tities exactly exchanged for the other, the demand of Eng- 
land would on our present supposition be exactly satisfied, 
for she requires all the linen which can be got for a million 
yards of cloth : but Germany perhaps, though she required 
800,000 cloth at a cost equivalent to 1,600,000 linen, yet 
when she can get a million of cloth at the same cost, may 
not require the whole million ; or may require more than a 
million. First, let her not require so much ; but only as 

advantage to induce Germany to take the surplus. Thus the case which seemed 
at first sight to be bevond the limits, is transformed practically into a case either 
coinciding with one of the limits or between them. And so with every other 
case which can be supposed. 



INTERNATIONAL VALUES. 161 

much as she can now buy for 1,500,000 linen. England 
will still offer a million for these 1,500,000, but even this 
may not induce Germany to take so much as a million ; 
and if England continues to expend exactly the same ag- 
gregate cost on linen whatever be the price, she will have 
to submit to take for her million of cloth any quantity of 
linen (not less than a million) which may be requisite to 
induce Germany to take a million of cloth. Suppose this 
to be 1,400,000 yards. England has now reaped from the 
trade a gain not of 600,000 but only of 400,000 yards ; 
while Germany, besides having obtained an extra 200,- 
000 yards of cloth, has obtained it with only seven-eighths 
of the labour and capital which she previously expended in 
supplying herself with cloth, and may expend the remain- 
der in increasing her own consumption of linen, or of any 
other commodity. 

Suppose on the contrary that Germany, at the rate of a 
million cloth for 1,600,000 linen, requires more than a 
million yards of cloth. England having only a million 
which she can give without trenching upon the quantity 
she previously reserved for herself, Germany must bid for 
the extra cloth at a higher rate than 160 for 100, until she 
reaches a rate (say 170 for 100) which will either bring 
down her own demand for cloth to the limit of a million, or 
else tempt England to part with some of the cloth she pre- 
viously consumed at home. 

Let us next suppose that the proportionality of demand 
to cheapness, instead of holding good in one country but 
not in the other, does not hold good in either country, and 
that the deviation is of the same kind in both ; that, for 
instance, neither of the two increases its demand in a de- 
gree equivalent to the increase of cheapness. On this sup- 
position, at the rate of one million cloth for 1,600,000 linen, 
England will not want so much as 1,600,000 linen, nor Ger- 
many so much as a million cloth : and if they fall short 
of that amount in exactly the same degree ; if England only 

wants linen to the amount of nine-tenths of 1,600,000 
50 



X62 BOOK III. CHAPTER XVIII. §8. 

(1,440,000), and Germany only nine hundred thousand of 
cloth, the interchange will continue to take place at the same 
rate. And so if England wants a tenth more than 1,600,- 
000, and Germany a tenth more than a million. This 
coincidence (which it is to be observed, supposes demand to 
extend cheapness in a corresponding, but not in an equal 
degree*) evidently could not exist unless by mere accident : 
and in any other case, the equation of international demand 
would require a different adjustment of international values. 

The only general law, then, which can be laid down, is 
this. The values at which a country exchanges its produce 
with foreign countries depend on two things : first, on the 
amount and extensibility of their demand for its commodi- 
ties, compared with its demand for theirs ; and secondly, 
on the capital which it has to spare, from the production 
of domestic commodities for its own consumption. The 
more the foreign demand for its commodities exceeds its 
demand for foreign commodities, and the less capital it can 
spare to produce for foreign markets, compared with what 
foreigners spare to produce for its markets, the more favour- 
able to it will be the terms of interchange : that is, the 
more it will obtain of foreign commodities in return for a 
given quantity of its own. 

But these two influencing circumstances are in reality 
reducible to one ; for the capital which a country has to 
spare from the production of domestic commodities for its 
own use, is in proportion to its own demand for foreign com- 
modities : whatever proportion of its collective income it 
expends in purchases from abroad, that same proportion of 
its capital is left without a home market for its productions. 
The new element, therefore, which for the sake of scientific 
correctness we have introduced into the theory of interna- 
tional values, does not seem to make any very material dif- 

* The increase of demand from 800,000 to 900,000, and that from a million 
to 1,440,000, are neither equal in themselves, nor bear an equal proportion to 
the increase of cheapness. Germany's demand for cloth has increased one- 
eighth, while the cheapness is increased one-fourth. England's demand for linen 
is increased 44 per cent, while the cheapness is increased 60 per cent- 



J 



INTERNATIONAL VALUES. 163 

ference in the practical result. It still appears, that the coun- 
tries which carry on their foreign trade on the most advan- 
tageous terms, are those whose commodities are most in de- 
mand by foreign countries, and which have themselves the 
least demand for foreign commodities. From which, among 
other consequences, it follows, that the richest countries, 
cceteris paribus, gain the least by a given amount of foreign 
commerce : since, having a greater demand for commodities 
generally, they are likely to have a greater demand for for- 
eign commodities, and thus modify the terms of interchange 
to their own disadvantage. Their aggregate gains by for- 
eign trade, doubtless, are generally greater than those of 
poorer countries, since they carry on a greater amount of 
such trade, and gain the benefit of cheapness on a larger 
consumption : but their gain is less on each individual ar- 
ticle consumed. 

§ 9. We now pass to another essential part of the 
theory of the subject. There are two senses in which a 
country obtains commodities cheaper by foreign trade ; in 
the sense of Value, and in the sense of Cost. It gets them 
cheaper in the first sense, by their falling in value relatively 
to other things : the same quantity of them exchanging, in 
the country, for a smaller quantity than before of the other 
produce of the country. To revert to our original figures ; 
in England, all consumers of linen obtained, after the trade 
was opened, 17 or some greater number of yards for the 
same quantity of all other things for which they before ob- 
tained only 15. The degree of cheapness, in this sense of 
the term, depends on the laws of International Demand, so 
copiously illustrated in the preceding sections. But in the 
other sense, that of Cost, a country gets a commodity 
cheaper, when it obtains a greater quantity of the com- 
modity with the same expenditure of labour and capital. 
In this sense of the term, cheapness in a great measure de- 
pends upon a cause of a different nature : a country gets 
its imports cheaper, in proportion to the general productive- 



164 BOOK III. CHAPTER XVIII. §9. 

ness of its domestic industry ; to the general efficiency of 
its labour. The labour of one country may be, as a whole, 
much more efficient than that of another : all or most of the 
commodities capable of being ' produced in both, may be 
produced in one at less absolute cost than in the other; 
which, as we have seen, will not necessarily prevent the two 
countries from exchanging commodities. The things which 
the more favoured country will import from others, are 
of course those in which it is least superior ;, but by import* 
ing them it acquires, even in those commodities, the same 
advantage which it possesses in the articles it gives in ex* 
change for them. Thus the countries which obtain their own 
productions at least cost, also get their imports at least cost. 
This will be made still more obvious if we suppose two 
competing countries. England sends cloth to Germany, 
and gives 10 yards of it for IT yards of linen, or for some- 
thing else which in Germany is the equivalent of those IT 
yards. Another country, as for example France, does the 
same. The one giving 10 yards of cloth for a certain quan- 
tity of German commodities, so must the other : if, there- 
fore, in England, these 10 yards are produced by only half as 
much labour as that by which they are produced in France, 
the linen or other commodities of Germany will cost to 
England only half the amount of labour which they will cost 
to France. England would thus obtain her imports at less 
cost than France, in the ratio of the greater efficiency of her 
labour in the production of cloth : which might be taken, 
in the ' case, supposed, as an approximate estimate of the 
efficiency of her labour generally ; since, France, as well as 
England, by selecting cloth as her article of export, would 
have shown that with her also it was the commodity in 
which labour was relatively the most efficient. It follows, 
therefore, that every country gets its imports at less cost, 
in proportion to the general efficiency of its labour. 

This proposition was first clearly seen and expounded by 
Mr. Senior, * but only as applicable to the importation of the 

* Thre # e Lectures on the Cost of Obtaining Money. 



INTERNATIONAL VALUES. 165 

precious metals. I think it important to point out that the 
proposition holds equally true of all other imported commodi- 
ties; and further, that it is only a portion of the truth. 
For, in the case supposed, the cost to England of the linen 
which she pays for with ten yards of cloth, does not depend 
solely upon the cost to herself of ten yards of cloth, but 
partly also upon how many yards of linen she obtains in ex- 
change for them. What her imports cost to her is a function 
of two variables ; the quantity of her own commodities which 
she gives for them, and the cost of those commodities. Of 
these, the last alone depends on the efficiency of her labour : 
the first depends on the law of international values ; that is 
on the intensity and extensibility of the foreign demand for 
her commodities, compared with her demand for foreign 
commodities. 

In the case just now supposed, of a competition between 
England and France, the state of international values affected 
both competitors alike, since they were supposed to trade 
with the same country, and to export and import the same 
commodities. The difference, therefore, in what their im- 
ports cost them, depended solely on the other cause, the un- 
equal efficiency of their labour. They gave the same quan- 
tities ; the difference could only be in the cost of production. 
But if England traded to Germany with cloth, and France 
with iron, the comparative demand in Germany for those two 
commodities would bear a share in determining the com- 
parative cost, in labour and capital, with which England 
and France would obtain German products. If iron were 
more in demand in Germany than cloth, France would re- 
cover, through that channel, part of her disadvantage ; if less, 
her disadvantage would be increased. The efficiency, there- 
fore, of a country's labour, is not the only thing which deter- 
mines even the cost at which that country obtains imported 
commodities — while it has no share whatever in determining 
either their exchange value, or, as we shall presently see, 
their price. 



CHAPTER XIX. 

OF MONEY CONSIDERED AS AN IMPORTED COMMODITY. 

§ 1. The degree of progress which we have now made 
in the theory of Foreign Trade, puts it in our power to sup- 
ply what was previously deficient in our view of the theory of 
Money ; and this, when completed, will in its turn enable us 
to conclude the subject of Foreign Trade. 

Money, or the material of which it is composed, is, in 
Great Britain, and in most other countries, a foreign commo- 
dity. Its value and distribution must therefore be regulated, 
not by the law of value which obtains in adjacent places, but 
by that which is applicable to imported commodities — the 
law of International Yalues. 

In the discussion into which we are now about to enter, I 
shall use the terms Money and the Precious Metals indiscri- 
minately. This may be done without leading to any error; 
it having been shown that the value of money, when it con- 
sists of the precious metals, or of a paper currency convertible 
into them on demand, is entirely governed by the value of the 
metals themselves : from which it never permanently diners, 
except by the expense of coinage when this is paid by the 
individual and not by the state. 

Money is brought into a country in two different ways. 
It is imported (chiefly in the form of bullion) like any other 
merchandize, as being an advantageous article of commerce. 
It is also imported in its other character of a medium of 
exchange, to pay some debt due to the country, either for 
goods exported or on any other account. There are other 






MONEY AS AN IMPORTED COMMODITY. 167 

ways in which it may be introduced casually ; these are the 
two in which it is received in the ordinary course of business, 
and which determine its value. The existence of these two 
distinct modes in which money flows into a country, while 
other commodities are habitually introduced only in the first 
of these modes, occasions somewhat more of complexity and 
obscurity than exists in the case of other commodities, and 
for this reason only is any special and minute exposition 
necessary. 

§ 2. In so far as the precious metals are imported in the 
ordinary way of commerce, their value must depend on the 
same causes, and conform to the same laws, as the value of 
any other foreign production. It is in this mode chiefly that 
gold and silver diffuse themselves from the mining countries 
into all other parts of the commercial world. They are the 
staple commodities of those countries, or at least are among 
their great articles of regular export ; and are shipped on 
speculation, in the same manner as other exportable com- 
modities. The quantity, therefore, which a country (say Eng- 
land) will give of its own produce, for a certain quantity of 
bullion, will depend, if we suppose only two countries and 
two commodities, upon the demand in England for bullion, 
compared with the demand in the mining country (which we 
will call Brazil) for what England has to give. They must 
exchange in such proportions as will leave no unsatisfied 
demand on either side, to alter values by its competition. 
The bullion required by England must exactly pay for the 
cottons or other English commodities required by Brazil. If, 
however, we substitute for this simplicity the degree of com- 
plication which really exists, the equation of international 
• demand must be established not between the bullion wanted 
in England and the cottons or broadcloth wanted in Brazil, 
but between the whole of the imports of England and the 
whole of her exports. The demand in foreign countries for 
English products, must be brought into equilibrium with the 
demand in England for the products of foreign countries ; an^ 



X6S COOK III. CHAPTER XIX. §2. 

all foreign commodities, bullion among the rest, must be 
exchanged against English products in such proportions, as 
will, by the effect they produce on the demand, establish this 
equilibrium. 

There is nothing in the peculiar nature or uses of the 
precious metals, which should make them an exception to 
the general principles of demand. So far as they are 
wanted for purposes of luxury or the arts, the demand in- 
creases with the cheapness, in the same irregular way as 
the demand for any other commodity. So far as they are 
required for money, the demand increases with the cheap- 
ness in a perfectly regular way, the quantity needed being 
always in inverse proportion to the value. This is the only 
real difference, in respect to demand, between money and 
other things ; and for the present purpose it is a difference 
altogether immaterial. 

Money, then, if imported solely as a merchandize, will, 
like other imported commodities, be of lowest value in the 
countries for whose exports there is the greatest foreign de- 
mand, and which have themselves the least demand for 
foreign commodities. To these two circumstances it is how- 
ever necessary to add two others, which produce their effect 
through cost of carriage. The cost of obtaining bullion is 
compounded of two elements ; the goods given to purchase 
it, and the expense of transport ; of which last, the*bullion 
countries will bear a part, (though an uncertain part,) in 
the adjustment of international values. The expense of 
transport is partly that of carrying the goods to the bullion 
countries, and partly that of bringing back the bullion : 
both these items are influenced by the distance from the 
mines ; and the former is also much affected by the bulki- 
ness of the goods. Countries whose exportable produce 
consists of the finer manufactures, obtain bullion, as well as 
all other foreign articles, cceteris paribus, at less expense 
than countries which export nothing but bulky raw produce. 

To be quite accurate, therefore, we must say — The 
countries whose exportable productions are most in de- 



MONEY AS AN IMPORTED COMMODITY. 169 

raand abroad, and contain greatest value in smallest bulk, 
which are nearest to the mines, and which have least de- 
mand for foreign productions, are those in which money 
will be of lowest value, or in other words, in which prices 
will habitually range the highest. If we are speaking not 
of the value of money, but of its cost, (that is, the quantity 
of the country's labour which must be expended to obtain 
it,) we must add to the^e four conditions of cheapness a fifth 
condition, namely, " whose productive industry is the most 
efficient." This last, however, does not at all affect the 
value of money, estimated in commodities : it affects the 
general abundance and facility with which all things, mon- 
ey and commodities together, can be obtained. 

Although, therefore, Mr. Senior is right in pointing out 
the great efficiency of English labour as the chief cause why 
the precious metals are obtained at less cost by England than 
by most other countries, I cannot admit that it at all ac- 
counts for their being of less value ; for their going less 
far in the purchase of commodities. This, in so far as it is 
a fact, and not an illusion, must be occasioned by the great 
demand in foreign countries for the staple commodities of 
England, and the generally unbulky character of those com- 
modities, compared with the corn, wine, timber, sugar, 
wool, hides, tallow, hemp, flax, tobacco, raw cotton, &c, 
which form the exports of other commercial countries. 
These two causes will account for a somewhat higher range 
of general prices in England than elsewhere, notwithstanding 
the counteracting influence of her own great demand for 
foreign commodities. I am, however, strongly of opinion 
that the high prices of commodities, and low purchasing 
power of money in England, are more apparent than real. 
Food, indeed, is somewhat dearer ; and food composes so 
large a portion of the expenditure when the income is small 
and the family large, that to such families England is a 
dear country. Services, also, of most descriptions, are 
dearer than in the other countries of Europe, from the less 
costly mode of living of the poorer classes on the Continent. 



170 B00K HI. CHAPTER XIX. §3. 

But manufactured commodities (except most of those in 
which good taste is required) are decidedly cheaper ; or 
would be so, if buyers would be content with the same 
quality of material and of workmanship. What is called 
the dearness of living in England, is mainly an affair not 
of necessity but of foolish custom ; it being thought impera- 
tive by all classes in England above the condition of a day- 
labourer, that the things they consume should either be of 
the same quality with those used by much richer people 
or at least should be as nearly as possible undistinguishable 
from them in outward appearance. 






§ 3. From the preceding considerations, it appears that 
those are greatly in error who contend that the value of 
money, in countries where it is an imported commodity, 
must be entirely regulated by its value in the countries 
which produce it ; and cannot be raised or lowered in any 
permanent manner unless some change has taken place in 
the cost of production at the mines. On the contrary, any 
circumstance which disturbs the equation of international 
demand with respect to a particular country, not only may, 
but must, affect the value of money in that country — its 
value at the mines remaining the same. The opening of a 
new branch of export trade from England ; an increase in 
the foreign demand for English products, either by the nat- 
ural course of events or by the abrogation of duties ; a 
check to the demand in England for foreign commodities, 
by the laying on of import duties in England or of export 
duties elsewhere ; these and all other events of similar ten- 
dency, would make the imports of England (bullion and 
other things taken together) no longer an equivalent for the 
exports ; and the countries which take her exports would 
be obliged to offer their commodities, and bullion among 
the rest, on cheaper terms, in order to re-establish the equa- 
tion of demand : and thus England would obtain money 
cheaper, and would acquire a generally higher range of 
prices. Incidents the reverse of these would produce effects 



MONEY AS AN IMPORTED COMMODITY. 171 

the reverse — would reduce prices ; or, in other words, raise 
the value of the precious metals. It must be observed, 
however, that money would be thus raised in value only 
with respect to home commodities : in relation to all im- 
ported articles it would remain as before, since their values 
would be affected in the same way and in the same degree 
with its own. A country which, from any of the causes 
mentioned, gets money cheaper, obtains all its other inr 
ports cheaper likewise. 

It is by no means necessary that the increased demand 
for English commodities, which enables England to supply 
herself with bullion at a cheaper rate, should be a demand 
in the mining countries. England might export nothing 
whatever to those countries, and yet might be the country 
which obtained bullion from them on the lowest terms, pro- 
vided there were a sufficient intensity of demand in other 
foreign countries for English goods, which would be paid 
for circuitously, with gold and silver from the mining coun- 
tries. The whole of its exports are what a country ex- 
changes against the whole of its imports, and not its exports 
and imports to and from any one country ; and the general 
foreign demand for its productions will determine what 
equivalent it must give for imported goods, in order to es- 
tablish an equilibrium between its sales and purchases gen- 
erally ; without regard to the maintenance of a similar 
equilibrium between it and any country singly. 



CHAPTEE XX. 

OF THE FOREIGN EXCHANGES. 

§ 1. "We have thus far considered the precious metals as 
a commodity, imported like other commodities in the com- 
mon course of trade, and have examined what are the cir- 
cumstances which would in that case determine their value. 
But those metfals are also imported in another character, 
that which belongs to them as a medium of exchange ; not 
as an article of commerce, to be sold for money, but as 
themselves money, to pay a debt, or effect a transfer of 
property. It remains to consider whether the liability of 
gold and silver to be transported from country to country 
for such purposes, in any way modifies the conclusions we 
have already arrived at, or places those metals under a 
different law of value from that to which, in common with 
all other imported commodities, they would be subject if 
international trade were an affair of direct barter. 

Money is sent from one country to another for various 
purposes : such as the payment of tributes or subsidies ; re- 
mittances of revenue to or from dependencies, or of rents or 
other incomes to their absent owners ; emigration of capi- 
tal, or transmission of it for foreign investment. The most 
usual purpose, however, is that of payment for goods. To 
show in what circumstances money actually passes from 
country to country for this or any of the other purposes men- 
tioned, it is necessary briefly to state the nature of the mechan- 
ism by which international trade is carried on, when it takes 
place not by barter but through the medium of money. 



THE FOREIGN EXCHANGES. 173 

§ 2. In practice, the exports and imports of a country 
not only are not exchanged directly against each other, but 
often do not even pass through the same hands. Each is 
separately bought and,, paid for with money. "We have 
seen, however, that, even in the same country, money does 
not actually pass from hand to hand each time that pur- 
chases are made with it, and still less does this happen be- 
tween different countries. The habitual mode of paying 
and receiving payment for commodities, between country 
and country, is by bills of exchange. 

A merchant in England, A, has exported English com- 
modities, consigning them to his correspondent B in France. 
Another merchant in France, C, has exported French com- 
modities, suppose of equivalent value, to a merchant D in 
England. It is evidently unnecessary that B in France 
should send money to A in England, and that D in Eng- 
land should send an equal sum of money to C in France. 
The one debt may be applied to the payment of the other, 
and the double cost and risk of carriage be thus saved. A 
draws a bill on B for the amount which B owes to him : D, 
having an equal amount to pay in France, buys this bill 
from A, and sends it to C, who, at the expiration of the 
number of days which the bill has to run, presents it to B 
for payment. Thus the debt due from France to England, 
and the debt due from England to France, are both paid 
without sending an ounce of gold or silver from one coun- 
try to the other. 

In this statement, however, it is supposed, that the sum 
of the debts due from France to England, and the sum of those 
due from England to France, are equal ; that each country 
has exactly the same number of ounces of gold or silver to pay 
and to receive. This implies, (if we exclude for the present 
any other international payments than those occurring in 
the course of commerce,) that the exports and imports ex- 
actly pay for one another, or in other words, that the equa- 
tion of international demand is established. When such is 
the fact, the international transactions are liquidated with- 



174 B00K IIL CHAPTER XX. §2. 

out the passage of any money from one country to the 
other. But if there is a greater sum due from England to 
France, than is due from France to England, or vice versa, 
the debts cannot be simply written off against one another. 
After the one has been applied, as far as it will go, towards 
covering the other, the balance must be transmitted in the 
precious metals. In point of fact, the merchant who has the 
amount to pay, will even then pay for it by a bill. When 
a person has a remittance to make to a foreign country, he 
does not himself search for some who has money to receive 
from that country, and ask him for a bill of exchange. In 
this as in other branches of business, there is a class of mid- 
dlemen or brokers, who bring buyers and sellers together, 
or stand between them, buying bills from those who have 
money to receive, and selling bills to those who have money 
to pay. When a customer comes to a broker for a bill on 
Paris or Amsterdam, the broker sells to him, perhaps the 
bill he may himself have bought that morning from a mer- 
chant, perhaps a bill on his own correspondent in the for- 
eign city : and to enable his correspondent to pay, when 
due, all the bills he has granted, he remits to him all those 
which he has bought and has not resold. In this manner 
these brokers take upon themselves the whole settlement 
of the pecuniary transactions between distant places, being 
remunerated by a small commission or percentage on the 
amount of each bill which they either sell or buy. Now, 
if the brokers find that they are asked for bills on the one 
part, to a greater amount than bills are offered to them on the 
other, they do not on this account refuse to give them ; but 
since, in that case, they have no means of enabling the cor- 
respondents on whom their bills are drawn, to pay them 
when due, except by transmitting part of the amount in 
gold or silver, they require from those to whom they sell 
bills an additional price, sufficient to cover the freight and 
insurance of the gold and silver, with a profit sufficient to 
compensate them for their trouble and for the temporary 
occupation of a portion of their capital. This premium (as 



THE FOREIGN EXCHANGES. l75 

it is called) the buyers are willing to pay, because they must 
otherwise go to the expense of remitting the precious metals 
themselves, and it is done cheaper by those who make 
doing it a part of their especial business. But though only 
some of those who have a debt to pay would have actually 
to remit money, all will be obliged, by each other's competi- 
tion, to pay the premium ; and the brokers are for the same 
reason obliged to pay it to those whose bills they buy. The 
reverse of all this happens, if on the comparison of exports 
and imports, the country, instead of having a balance to 
pay, has a balance to receive. The brokers find more bills 
offered to them, than are sufficient to cover those which they 
are required to grant. Bills on foreign countries conse- 
quently fall to a discount ; and the competition among the 
brokers, which is exceedingly active, prevents them from 
retaining this discount as a profit for themselves, and obliges 
them to give the benefit of it to those who buy the bills for 
purposes of remittance. 

Let us suppose that all countries had the same currency, 
as in the progress of political improvement they one day will 
have : and, as the most familiar to the reader, though not the 
best, let us suppose this currency to be the English. When 
England had the same number of pounds sterling to pay to 
France, which France had to pay to her, one set of merchants 
in England would want bills, and another set would have bills 
to dispose of, for the very same number of pounds sterling ; 
and consequently a bill on France for 100/. would sell for 
exactly 100Z., or, in the phraseology of merchants, the ex- 
change would be at par. As France also, on this supposition, 
would have an equal number of pounds sterling to pay and 
to receive, bills on England would be at par in France, when- 
ever bills on France were at par in England. 

If, however, England had a larger sum to pay to France 
than to receive from her, there would be persons requiring 
bills on France for a greater number of pounds sterling than 
there were bills drawn by persons to whom money was due. 
A bill on France for 100/. would then sell for more than 1007., 



176 B00K HI. CHAPTER XX. §2. 

and bills would be said to be at a premium. The premium, 
however, could not exceed the cost and risk of making the 
remittance in gold, together with a trifling profit ; because 
if it did, the debtor would send the gold itself, in preference 
to buying the bill. 

If, on the contrary, England had more money to receive 
from France than to pay, there would be bills offered for a 
greater number of pounds than were wanted for remittance, 
and the price of bills would fall below par : a bill for 100Z. 
might be bought for somewhat less than 100Z., and bills would 
be said to be at a discount. 

When England has more to pay than to receive, France 
has more to receive than to pay, and vice versa. When, 
therefore, in England, bills on France bear a premium, then, 
in France, bills on England are at a discount : and when 
bills on France are at a discount in England, bills on 
England are at a premium in France. If they are at par 
in either country, they are so, as we have already seen, in 
both. 

Thus do matters stand between countries, or places, which 
have the same currency. So much of barbarism, however, 
still remains in the transactions of the most civilized nations, 
that almost all independent countries choose to assert their 
nationality by having, to their own inconvenience and that 
of their neighbours, a peculiar currency of their own. To 
our present purpose this makes no other difference, than that 
instead of speaking of equal sums of money, we have to 
speak of equivalent sums. By equivalent sums, when both 
currencies are composed of the same metal, are meant sums 
which contain exactly the same quantity of the metal, in 
weight and fineness ; but when, as in the case of France and 
England, the metals are different, what is meant is that the 
quantity of gold in the one sum, and the quantity of silver 
in the other, are of the same value in the general market of 
the world : there being no material difference between one 
place and another in the relative value of these metals. 
Suppose 25 francs to be (as within a trifling fraction it is) 



THE FOREIGN EXCHANGES. 177 

the equivalent of a pound sterling. The debts and credits 
of the two countries would be equal, when the one owed as 
many times 25 francs, as the other owed pounds. When 
this was the case, a bill on France for 2500 francs would be 
worth in England 100Z., and a bill on England for 100Z. 
would be worth in France 2500 francs. The exchange is 
then said to be at par : and 25 francs (in reality 25 francs 
and a trifle more)* is called the par of exchange with France. 
When England owed to France more than the equivalent 
of what France owed to her, a bill for 2500 francs would 
be at a premium, that is would be worth more than 100Z. 
When France owed to England more than the equiv- 
alent of what England owed to France, a bill for 2500 
francs would be worth less than 100Z., or would be at a dis- 
count. 

When bills on foreign countries are at a premium, it is 
customary to say that the exchanges are against the country, 
or unfavourable to it. In order to understand these phrases, 
we must take notice of what " the exchange" in the language 
of merchants, really means. It means the power which 
the money of the country has of purchasing the money of 
other countries. Supposing 25 francs to be the exact par 
of exchange, then when it requires more than 100Z. to buy a 
bill for 2500 francs, 100?. of English money are worth less 
than their real equivalent of French money : and this is 
called, an exchange unfavourable to England. The only 
persons in England, however, to whom it is really unfavour- 
able, are those who have money to pay in France ; for they 
come into the bill market as buyers, and have to pay a pre- 
mium ; but to those who have money to receive in France, 
the same state of things is favourable ; for they come as 
sellers and receive the premium. The premium, however, 
indicates that a balance is due by England, which must be 

* Written before the change in the relative value of the two metals pro- 
duced by the gold discoveries. The par of exchange between gold and silver 
currencies is now variable, and no one can foresee at what point it will ultimately 
rest. 

51 



X78 B00K m - CHAPTER XX. §3. 

eventually liquidated in the precious metals: and since, 
according to the old theory, the benefit of a trade consisted in 
bringing money into the country, this prejudice introduced 
the practice of calling the exchange favourable when it indi- 
cated a balance to receive, and unfavourable when it indicated 
one to pay : and the phrases in turn tended to maintain the 
prejudice. 

§ 3. It might be supposed at first sight that when the 
exchange is unfavourable, or in other words, when bills are 
at a premium, the premium must always amount to a full 
equivalent for the cost of transmitting money : since, as there 
is really a balance to pay, and as the full cost must therefore 
be incurred by some of those who have remittances to make, 
their competition will compel all to submit to an equivalent 
sacrifice. And such would certainly be the case, if it were 
always necessary that whatever is destined to be paid should 
be paid immediately. The expectation of great and imme- 
diate foreign payments sometimes produces a most startling 
effect on the exchanges.* But a small excess of imports 
above exports, or any other small amount of debt to be paid 
to foreign countries, does not usually affect the exchanges to 
the full extent of the cost and risk of transporting bullion. 
The length of credit allowed, generally permits, on the part 
of some of the debtors, a postponement of payment, and in 
the mean time the balance may turn the other way, and re- 

* On the news of Bonaparte's landing from Elba, the price of bills advanced 
in one day as much as ten per cent. Of course this premium was not a mere 
equivalent for cost of carriage, since the freight of such an article as gold, even 
with the addition of war insurance, could never have amounted to so much. 
This great price was an equivalent not for the difficulty of sending gold, but for 
the anticipated difficulty of procuring it to send ; the expectation being that 
there would be such immense remittances to the Continent in subsidies and for 
the support of armies, as would press hard on the stock of bullion in the country 
(which was then entirely denuded of specie), and this, too, in a shorter time than 
would allow of its being replenished. Accordingly the price of bullion rose like- 
wise, with the same suddenness. It is hardly necessary to say that this took 
place during the Bank restriction. In a convertible state of the currency, no 
such thing could have occurred until the Bank stopped payment. 



THE FOREIGN EXCHANGES. 179 

store the equality of debts and credits without any actual 
transmission of the metals. And this is the more likely to 
happen, as there is a self-adjusting power in the variations of 
tjie exchange itself. Bills are at a premium because a greater 
money value has been imported than exported. But the 
premium is itself an extra profit to those who export. 
Besides the price they obtain for their goods, they draw for 
the amount and gain the premium. It is, on the other hand, 
a diminution of profit to those who import. Besides the 
price of the goods, they have to pay a premium for remit- 
tance. So that what is called an unfavourable exchange is 
an encouragement to export, and a discouragement to import. 
And if the balance due is of small amount, and is the conse- 
quence of some merely casual disturbance in the ordinary 
course of trade, it is soon liquidated in commodities, and the 
account adjusted by means of bills, without the transmission 
of any bullion. Not so, however, when the excess of 
imports above exports, which has made the exchange un- 
favourable, arises from a permanent cause. In that case, 
what disturbed the equilibrium must have been the state of 
prices, and it can only be restored by acting on prices. It 
is impossible that prices should be such as to invite to an 
excess of imports, and yet that the exports should be kept 
permanently up to the imports by the extra profit on expor- 
tation derived from the premium on bills ; for if the exports 
were kept up to the imports, bills would not be at a premium, 
and the extra profit would not exist. It is through the 
prices of commodities that the correction must be adminis- 
tered. 

Disturbances, therefore, of the equilibrium of imports and 
exports, and consequent disturbances of the exchange, may 
be considered as of two classes ; the one casual or accidental, 
which, if not on too large a scale, correct themselves through 
the premium on bills, without any transmission of the pre- 
cious metals ; the other arising from the general state of 
prices, which cannot be corrected without the subtraction of 
actual money from the circulation of one of the countries, or 



180 BOOK III. CHAPTER XX. §3. 

an annihilation of credit equivalent to it ; since the mere # 
transmission of bullion (as distinguished from money), not 
having any effect on prices, is of no avail to abate the cause 
from which the disturbance proceeded. 

It remains to observe, that the exchanges do not depend 
on the balance of debts and credits with each country sepa- 
rately, but with all countries taken together. England may 
owe a balance of payments to France ; but it does not follow 
that the exchange with France will be against England, and 
that bills on France will be at a premium ; because a balance 
may be due to England from Holland or Hamburg, and she 
may pay her debts to France with bills on those places ; which 
is technically called arbitration of exchange. There is some 
little additional expense, partly commission and partly loss 
of interest in settling debts in this circuitous manner, and to 
the extent of that small difference the exchange with one 
country may vary apart from that with others ; but in the 
main, the exchanges with all foreign countries vary together, 
according as the country has a balance to receive or to pay 
on the general result of its foreign transactions. 



CHAPTEE XXI. 

OF THE DISTRIBUTION OF THE PRECIOUS METALS THROUGH 
THE COMMERCIAL WORLD. 

§ 1. Having now examined the mechanism by which the 
commercial transactions between nations are actually conduct- 
ed, we have next to inquire whether this mode of conducting 
them makes any difference in the conclusions respecting in- 
ternational values, which we previously arrived at on the 
hypothesis of barter. 

The nearest analogy would lead us to presume the nega- 
tive. We did not find that the intervention of money and 
its substitutes made any difference in the law of value as 
applied to adjacent places. Things which would have been 
equal in value if the mode of exchange had been by barter, 
are worth equal sums of money. The introduction of money 
is a mere addition of one more commodity, of which the value 
is regulated by the same laws as that of all other commodities. 
We shall not be surprised, therefore, if we find that inter- 
national values also are determined by the same caused 
under a money and bill system, as they would be under a 
system of barter ; and that money has little to do in the 
matter, except to furnish a convenient mode of comparing 
values. 

All interchange is, in substance and effect, barter : who- 
ever sells commodities for money, and with that money buys 
other goods, really buys those goods with his own commod- 
ities. And so of nations : their trade is a mere exchange of 
exports for imports ; and whether money is employed or not, 



182 BOOK III. CHAPTER XXI. § 1. 

things are only in their permanent state when the exports 
and imports exactly pay for each other. When this is the 
case, equal sums of money are due from each country to the 
other, the debts are settled by bills, and there is no balance 
to be paid in the precious metals. The trade is in a state 
like that which is called in mechanics a condition of stable 
equilibrium. 

But the process by which things are brought back to 
this state when they happen to deviate from it, is, at least 
outwardly, not the same in a barter system and in a money 
system. Under the first, the country which wants more 
imports than its exports will pay for, must offer its exports 
at a cheaper rate, as the sole means of creating a demand 
for them sufficient to re-establish the equilibrium. When 
money is used, the country seems to do a thing totally dif- 
ferent. She takes the additional imports at the same price 
as before, and as she exports no equivalent, the balance of 
payments turns against her ; the exchange becomes unfa- 
vourable, and the difference has to be paid in money. This 
is in appearance a very distinct operation from the former. 
Let us see if it differs in its essence, or only in its mechanism. 

Let the country which has the balance to pay be Eng- 
land, and the country which receives it, France. By this 
transmission of the precious metals, the quantity of the cur- 
rency is diminished in England, and increased in France. 
This I am at liberty to assume. As we shall see hereafter, 
it would be a very erroneous assumption if made in regard 
to all payments of international balances. A balance which 
has only to be paid once, such as the payment made for an 
extra importation of corn in a season of dearth, may be paid 
from hoards, or from the reserves of bankers, without act- 
ing on the circulation. But we are now supposing that 
there is an excess of imports over exports, arising from the 
fact that the equation of international demand is not yet 
established : that there is at the ordinary prices a perma- 
nent demand in England for more French goods than the 
English goods required in France at the ordinary prices will 






DISTRIBUTION OF THE PRECIOUS METALS. 183 

pay for. When this is the case, if a change were not made 
in the prices, there would be a perpetually renewed balance 
to be paid in money. The imports require to be perma- 
nently diminished, or the exports to be increased ; which 
can only be accomplished through prices ; and hence, even 
if the balances are at first paid from hoards, or by the ex- 
portation of bullion, they will reach the circulation at last, 
for until they do, nothing can stop the drain. 

When, therefore, the state of prices is such that the 
equation of international demand cannot establish itself, the 
country requiring more imports than can be paid for by the 
exports ; it is a sign that the country has more of the pre- 
cious metals or their substitutes, in circulation, than can 
permanently circulate, and must necessarily part with some 
of them before the balance can be restored. The currency 
is accordingly contracted : prices fall, and among the rest, 
the prices of exportable articles ; for which accordingly, 
there arises, in foreign countries, a greater demand : while 
imported commodities have possibly risen in price, from 
the influx of money into foreign countries, and at all events 
have not participated in the general fall. But until the in- 
creased cheapness of English goods induces foreign coun- 
tries to take a greater pecuniary value, or until the increased 
dearness (positive or comparative) of foreign goods makes 
England take a less pecuniary value, the exports of England 
will be no nearer to paying for the imports than before, and 
the stream of the precious metals which had begun to flow 
out of England, will still flow on. This efflux will continue, 
until the fall of prices in England brings within reach of the 
foreign market some commodity which England did not 
previously send thither ; or until the reduced price of the 
things which she did send, has forced a demand abroad for 
a sufficient quantity to pay for the imports, aided, perhaps, 
by a reduction of the English demand for foreign goods, 
through their enhanced price, either positive or comparative. 

Now this is the very process which took place on our 
original supposition of barter. Not only, therefore, does 



184 BOOK III. CHAPTER XXI. §1. 

the trade between nations tend to the same equilibrium be- 
tween exports and imports, whether money is employed or 
not, but the means by which this equilibrium is established 
are essentially the same. The country whose exports are 
not sufficient to pay for her imports, offers them on cheaper 
terms, until she succeeds in forcing the necessary demand : 
in other words, the Equation of International Demand, 
under a money system as well as under a barter system, is 
the law of international trade. Every country exports and 
imports the very same things, and in the very same quan- 
tity, under the one system as under the other. In a barter 
system, the trade gravitates to the point at which the sum 
of the imports exactly exchanges for the sum of the exports : 
in a money system, it gravitates to the point at which the 
sum of the imports and the sum of the exports exchange 
for the same quantity of money. And since things which 
are equal to the same thing are equal to one another, the 
exports and imports which are equal in money price, would, 
if money were not used, precisely exchange for one another.* 

* The subjoined extract from the separate Essay previously referred to, will 
give some assistance in following the course of the phenomena. It is adapted 
to the imaginary case used for illustration throughout that Essay, the case of a 
trade between England and Germany in cloth and linen. 

" We may, at first, make whatever supposition we will with respect to the 
value of money. Let us suppose, therefore, that before the opening of the 
trade, the price of cloth is the same in both countries, namely, six shillings per 
yard. As ten yards of cloth were supposed to exchange in England for fifteen 
yards of linen, in Germany for twenty, we must suppose that linen is sold in 
England at four shillings per yard, in Germany at three. Cost of carriage and 
importer's profit are left, as before, out of consideration. 

" In this state of prices, cloth, it is evident, cannot yet be exported from 
England into Germany : but linen can be imported from Germany into England. 
It will be so ; and, in the first instance, the linen will be paid for in money. 

" The efflux of money from England, and its influx into Germany, will raise 
money prices in the latter country, and lower them in the former. Linen will 
rise in Germany above three shillings per yard, and cloth above six shillings. 
Linen in England, being imported from Germany, will (since cost of carriage is 
not reckoned) sink to the same price as in that country, while cloth will fall be- 
low six shillings. As soon as the price of cloth is lower in England than in 
Germany, it will begin to be exported, and the price of cloth in Germany will 
fall to what it is in England. As long as the cloth exported does not suffice to 



DISTRIBUTION OF THE PRECIOUS METALS. 185 

§ 2. It thus appears that the law of international 
values, and, consequently, the division of the advantages of 
trade, among the nations which carry it on, are the same, 
on the supposition of money, as they would be in a state 
of barter. In international, as in ordinary domestic inter- 
changes, money is to commerce only what oil is to machin- 
ery, or railways to locomotion, a contrivance to diminish 
friction. In order still further to test these conclusions, let 

pay for the linen imported, money will continue to flow from England into Ger- 
many, and prices generally will continue to fall in England and rise in Germany. 
By the fall, however, of cloth in England, cloth will fall in Germany also, and 
the demand for it will increase. By the rise of linen in Germany, linen must 
rise in England also, and the demand for it will diminish. As cloth fell in price 
and linen rose, there would be some particular price of both articles at which 
the cloth exported and the linen imported would exactly pay for each other. 
At this point prices would remain, because money would then cease to move out 
of England into Germany. What this point might be, would entirely depend 
upon the circumstances and inclinations of the purchasers on both sides. If the 
fall of cloth did not much increase the demand for it in Germany, and the rise 
of linen did not diminish very rapidly the demand for it in England, much 
money must pass before the equilibrium is restored ; cloth would fall very much, 
and linen would rise, until England, perhaps, had to pay nearly as much for it as 
when she produced it for herself. But if, on the contrary, the fall of cloth 
caused a very rapid increase of the demand for it in Germany, and the rise of 
linen in Germany reduced very rapidly the demand in England from what it was 
under the influence of the first cheapness produced by the opening of the trade ; 
the cloth would very soon suffice to pay for the linen, little money would pass 
between the two countries, and England would derive a large portion of the 
benefit of the trade. We have thus arrived at precisely the same conclusion, in 
supposing the employment of money, which we found to hold under the supposi- 
tion of barter. 

" In what shape the benefit accrues to the two nations from the trade is clear 
enough. Germany, before the commencement of the trade, paid six shillings 
per yard for broadcloth : she now obtains it at a lower price. This, however, is 
not the whole of her advantage. As the money-prices of all her other commodi- 
ties have risen, the money-incomes of all her producers have increased. This is 
no advantage to them in buying from each other, because the price of what they 
buy has risen in the same ratio with their means of paying for it: but it is an 
advantage to them in buying anything which has not risen, and, still more, any- 
thing which has fallen. They, therefore, benefit as consumers of cloth, not 
merely to the extent to which cloth has fallen, but also to the extent to which 
other prices have risen. Suppose that this is one-tenth. The same proportion 
of their money-incomes as before, will suffice to supply their other wants ; and 



186 B00K m - CHAPTER XXL §2. 

us proceed to re-examine, on the supposition of money, a 
question which we have already investigated on the hy- 
pothesis of barter, namely, to what extent the benefit of an 
improvement in the production of an exportable article, is 
participated in by the countries importing it. 

The improvement may either consist in the cheapening 
of some article which was already a staple production of the 
country, or in the establishment of some new branch of in- 
dustry, or of some process rendering an article exportable 
which had not till then been exported at all. It will be 



the remainder, being increased one-tenth in amount, will enable them to pur- 
chase one-tenth more cloth than before, even though cloth had not fallen : but it 
has fallen ; so that they are doubly gainers. They purchase the same quantity 
with less money, and have more to expend upon their other wants. 

" In England, on the contrary, general money-prices have fallen. Linen, 
however, has fallen more than the rest, having been lowered in price by importa- 
tion from a country where it was cheaper ; whereas the others have fallen only 
from the consequent efflux of money. Notwithstanding, therefore, the general 
fall of money-prices, the English producers will be exactly as they were in all 
other respects, while they will gain as purchasers of linen. 

"The greater the efflux of money required to restore the equilibrium, the 
greater will be the gain of Germany, both by the fall of cloth and by the rise of 
her general prices. The less the efflux of money requisite, the greater will be 
the gain of England ; because the price of linen will continue lower, and her 
general prices will not be reduced so much. It must not, however, be imagined 
that high money-prices are a good, and low money-prices an evil, in themselves. 
But the higher the general money-prices in any country, the greater will be that 
country's means of purchasing those commodities, which, being imported from 
abroad, are independent of the causes which keep prices high at home." 

In practice, the cloth and the linen would not, as here supposed, be at the 
same price in England and in Germany : each would be dearer in money-price 
in the country which imported than in that which produced it, by the amount of 
the cost of carriage, together with the ordinary profit on the importer's capital 
for the average length of time which elapsed before the commodity could be dis- 
posed of. But it does not follow that each country pays the cost of carriage of 
the commodity it imports ; for the addition of this item to the price may operate 
as a greater check to demand on one side than on the other ; and the equation 
of international demand, and consequent equilibrium of payments, may not be 
maintained. Money would then flow out of one country into the other, until, in 
the manner already illustrated, the equilibrium was restored : and, when this 
was effected, one country would be paying more than its own cost of carriage, 
and the other less. 



DISTRIBUTION OF THE PRECIOUS METALS. 187 

convenient to begin with the case of a new export, as being 
somewhat the simpler of the two. 

The first effect is that the article falls in price, and a 
demand arises for it abroad. This new exportation disturbs 
the balance, turns the exchanges, money flows into the 
country (which we shall suppose to be England), and con- 
tinues to flow until prices rise. This higher range of prices 
will somewhat check the demand in foreign countries for 
the new article of export ; and will diminish the demand 
which existed abroad for the other things which England 
was in the habit of exporting. The exports will thus be 
diminished ; while at the same time the English public, 
having more money, will have a greater power of purchas- 
ing foreign commodities. If they make use of this increased 
power of purchase, there will be an increase of imports ; 
and by this, and the check to exportation, the equilibrium 
of imports and exports will be restored. The result to for- 
eign countries will be, that they have to pay dearer than 
before for their other imports, and obtain the new com- 
modity cheaper than before, but not so much cheaper as 
England herself does. I say this, being well aware that the 
article would be actually at the very same price (cost of 
carriage excepted) in England and in other countries. The 
cheapness, however, of the article is not measured solely 
by the money-price, but by that price compared with the 
money incomes of the consumers. The price is the same 
to the English and to the foreign consumers ; but the former 
pay that price from money incomes which have been in- 
creased by the new distribution of the precious metals; 
while the latter have had their money incomes probably 
diminished by the same cause. The trade, therefore, has 
not imparted to the foreign consumer the whole, but only 
a portion, of the benefit which the English consumer has 
derived from the improvement; while England has also 
benefited in the prices of foreign commodities. Thus, then, 
any industrial improvement which leads to the opening of 
a new branch of export trade, benefits a country not only 



188 B00K m - CHAPTER XXI. §2. 

by the cheapness of the article in which the improvement 
has taken place, but by a general cheapening of all imported 
products. 

Let us now change the hypothesis, and suppose that the 
improvement, instead of creating a new export from Eng- 
land, cheapens an existing one. When we examined this 
case on the supposition of barter, it appeared to us that the 
foreign consumers might either obtain the same benefit from 
the improvement as England herself, or a less benefit, or 
even a greater benefit, according to the degree in which the 
consumption of the cheapened article is calculated to extend 
itself as the article diminishes in price. The same conclu- 
sions will be found true on the supposition of money. 

Let the commodity in which there is an improvement, 
be cloth. The first effect of the improvement is that its 
price falls, and there is an increased demand for it in the 
foreign market. But this demand is of uncertain amount. 
Suppose the foreign consumers to increase their purchases 
in the exact ratio of the cheapness, or in other words, to lay 
out in cloth the same sum of money as before ; the same 
aggregate payment as before will be due from foreign coun- 
tries to England ; the equilibrium of exports and imports 
will remain undisturbed, and foreigners will obtain the full 
advantage of the increased cheapness of cloth. But if the 
foreign demand for cloth is of such a character as to in- 
crease in a greater ratio than the cheapness, a larger sum 
than formerly will be due to England for cloth, and when 
paid will raise English prices, the price of cloth included ; 
this rise, however, will affect only the foreign purchaser, 
English incomes being raised in a corresponding propor- 
tion ; and the foreign consumer will thus derive a less ad- 
vantage than England from the improvement. If, on the 
contrary, the cheapening of cloth does not extend the for- 
eign demand for it in a proportional degree, a less sum of 
debts than before will be due to England for cloth, while 
there will be the usual sum of debts due from England to 
foreign countries ; the balance of trade will turn against 



DISTRIBUTION OF THE PRECIOUS METALS. 189 

England, money will be exported, prices (that of cloth in- 
cluded) will fall, and cloth will eventually be cheapened to 
the foreign purchaser in a still greater ratio, than the im- 
provement has cheapened it to England. These are the 
very conclusions which we deduced on the hypothesis of 
barter. 

The result of the preceding discussion cannot be better 
summed up than in the words of Bieardo.* " Gold and 
silver having been chosen for the general medium of circu- 
lation, they are, by the competition of commerce, distrib- 
uted in such proportions amongst the different countries of 
the world as to accommodate themselves to the natural 
traffic which would take place if no such metals existed, 
and the trade between countries were purely a trade of 
barter." Of this principle, so fertile in consequences, pre- 
vious to which the theory of foreign trade was an unintel- 
ligible chaos, Mr. Kicardo, though he did not pursue it into 
its ramifications, was the real originator. No writer who 
preceded him appears to have had a glimpse of it : and few 
are those who even since his time have had an adequate 
conception of its scientific value. 

§ 3. It is now necessary to inquire, in what manner 
this law of the distribution of the precious metals by means 
of the exchanges, affects the exchange value of money it- 
self; and how it tallies with the law by which we found 
that the value of money is regulated when imported as a 
mere article of merchandize. For there is here a semblance 
of contradiction, which has, I think, contributed more than 
anything else to make some distinguished political econo- 
mists resist the evidence of the preceding doctrines. Money, 
they justly think, is no exception to the general laws of 
value ; it is a commodity like any other, and its average 
or natural value must depend on the cost of producing, or 
at least of obtaining it. That its distribution through the 
world, therefore, and its different value in different places, 

* Principles of Political Economy and Taxation, 3rd ed. p. 143. 



190 BOOK III. CHAPTER XXI. §3. 

should be liable to be altered, not by causes affecting itself, 
but by a hundred causes unconnected with it ; by every- 
thing which affects the trade in other commodities, so as to 
derange the equilibrium of exports and imports ; appears 
to these thinkers a doctrine altogether inadmissible. 

But the supposed anomaly exists only in semblance- 
The causes which bring money into or carry it out of a. 
country through the exchanges, to restore the equilibrium 1 
of trade, and which thereby raise its value in some countries 
and lower it in others, are the very same causes on which 
the local value of money would dej)end, if it were never 
imported except as a merchandize, and never except directly 
from the mines. When the value of money in a country 
is permanently lowered by an influx of it through the bal- 
ance of trade, the cause, if it is not diminished cost of pro- 
duction, must be one of those causes which compel a new 
adjustment, more favourable to the country, of the equation 
of international demand : namely, either an increased de^- 
mand abroad for her commodities, or a diminished demand 
on her part for those of foreign countries. JSTow an increased 
foreign demand for the commodities of a country, or a di- 
minished demand in the country for imported commodities, 
are the very causes which, on the general principles of trade, 
enable a country to purchase all imports, 4 and consequently 
the precious metals, at a lower value. There is therefore 
no contradiction, but the most perfect accordance in the 
results of the two different modes in which the precious 
metals may be obtained. When money flows from country 
to country in consequence of changes in the international 
demand for commodities, and by so doing alters its own 
local value, it merely realizes, by a more rapid process, the 
effect which would otherwise take place more slowly, by 
an alteration in the relative breadth of the streams by which 
the precious metals flow into different regions of the earth 
from the mining countries. As therefore we before saw 
that the use of money as a medium of exchange does not 
in the least alter the law on which the values of other 



DISTRIBUTION OF THE PRECIOUS METALS. 191 

tilings, either in the same country, or internationally, de- 
pend, so neither does it alter the law of the value of the 
precious metal itself : and there is in the whole doctrine of 
international values as now laid down, a unity and harmony 
which is a strong collateral presumption of truth. 

§ 4. Before closing this discussion, it is fitting to point 
out in what manner and degree the preceding conclusions 
are affected by the existence of international payments not 
originating in commerce, and for which no equivalent in 
either money or commodities is expected or received ; such 
as a tribute, or remittances of rent to absentee landlords or 
of interest to foreign creditors, or a government expenditure 
abroad, such as England incurs in the management of some 
of her colonial dependencies. 

To begin with the case of barter. The supposed annual 
remittances being made in commodities, and being exports 
for which there is to be no return, it is no longer requisite 
that the imports and exports should pay for one another : 
on the contrary, there must be an annual excess of exports 
over imports, equal to the value of the remittance. If, be- 
fore the country became liable to the annual payment, for- 
eign commerce was in its natural state of equilibrium, it 
■will now be necessary for the purpose of effecting the remit- 
tances, that foreign countries should be induced to take a 
greater quantity of exports than before : which can only be 
done by offering those exports on cheaper terms, or in other 
words, by paying dearer for foreign commodities. The in- 
ternational values will so adjust themselves that either by 
greater exports, or smaller imports, or both, the requisite 
excess on the side of exports will be brought about ; and 
this excess will become the permanent state. The result 
is, that a country which makes regular payments to foreign 
countries, besides losing what it pays, loses also something 
more, by the less advantageous terms on which it is forced 
to exchange its productions for foreign commodities. 

The same results follow on the supposition of money 



192 BOOK III. CnAPTER XXI. §4. 

Commerce being supposed to be in a state of equilibrium 
when the obligatory remittances begin, the first remittance 
is necessarily made in money. This lowers prices in the 
remitting country, and raises them in the receiving. The 
natural effect is that more commodities are exported than 
before, and fewer imported, and that, on the score of com- 
merce alone, a balance of money will be constantly due 
from the receiving to the paying country. When the debt 
thus annually due to the tributary country becomes equal 
to the annual tribute or other regular payment due from it, 
no further transmission of money takes place ; the equili- 
brium of exports and imports will no longer exist, but that 
of payments will ; the exchange will be at par, the two 
debts will be set off against one another, and the tribute or 
remittance will be virtually paid in goods. The result to 
the interests of the two countries will be as already pointed 
out : the paying country will give a higher price for all 
that it buys from the receiving country, while the latter, 
besides receiving the tribute, obtains the exportable produce 
of the tributary country at a lower price. 



CHAPTEK XXII. 

INFLUENCE OF THE CURRENCY ON THE EXCHANGES AND ON 
FOREIGN TRADE. 

§ 1. In our inquiry into the laws of international trade, 
we commenced with the principles which determine inter- 
national exchanges and international values on the hypothe- 
sis of barter. We next showed that the introduction of 
money as a medium of exchange, makes no difference in 
the laws of exchanges and of values between country and 
country, no more than between individual and individual : 
since the precious metals, under the influence of those same 
laws, distribute themselves in such proportions among the 
different countries of the world, as to allow the very same 
exchanges to go on, and at the same values, as would be 
the case under a system of barter. We lastly considered 
how the value of money itself is affected, by those alter- 
ations in the state of trade which arise from alterations 
either in the demand and supply of commodities or in their 
cost of production. It remains to consider the alterations 
in the state of trade which originate not in commodities but 
in money. 

Gold and silver may vary like other things, though they 
are not so likely to vary as other things, in their cost of pro- 
duction. The demand for them in foreign countries may 
also vary. It may increase, by augmented employment of 
the metals for purposes of art and ornament, or because the 
increase of production and of transactions has created a 
greater amount of business to be done by the circulating 
52 



194 B00K ni - CHAPTER XXII. §2. 

medium. It may diminish, for the opposite reasons ; or 
from the extension of the economizing expedients by which 
the use of metallic money is partially dispensed with. 
These changes act upon the trade between other countries 
and the mining countries, and upon the value of the pre- 
cious metals, according to the general laws of the value of 
imported commodities : which have been set forth in the 
previous chapters with sufficient fulness. 

"What I propose to examine in the present chapter, is 
not those circumstances affecting money, which alter the 
permanent conditions of its value ; but the effects produced 
on international trade by casual or temporary variations in 
the value of money, which have no connexion with any 
causes affecting its permanent value. This is a subject of 
importance, on account of its bearing upon the practical 
problem which has excited so much discussion for sixty 
years past, the regulation of the currency. 

§ 2. Let us suppose in any country a circulating me- 
dium purely metallic, and a sudden casual increase made 
to it ; for example, by bringing into circulation hoards of 
treasure, which had been concealed in a previous period of 
foreign invasion or internal disorder. The natural effect 
would be a rise of prices. This would check exports, and 
encourage imports ; the imports would exceed the exports, 
the exchanges would become unfavorable, and a newly- 
acquired stock of money would diffuse itself over all coun- 
tries with which the supposed country carried on trade, and 
from them, progressively, through all parts of the commer- 
cial world. The money which thus overflowed would spread 
itself to an equal depth over all commercial countries. For 
it would go on flowing until the exports and imports again 
balanced one another : and this (as no change is supposed 
in the permanent circumstances of international demand) 
could only be, when the money had diffused itself so equally 
that prices had risen in the same ratio in all countries, so 
that the alteration of price would be for all practical pur- 



INFLUENCE OF CURRENCY ON FOREIGN TRADE. 195 

poses ineffective, and the exports and imports, though at a 
higher money valuation, would be exactly the same as they 
were originally. This diminished value of money through- 
out the world, (at least if the diminution was considerable) 
would cause a suspension, or at least a diminution, of the 
annual supply from the mines : since the metal would no 
longer command a value equivalent to its highest cost of 
production. The annual waste, would, therefore, not be 
fully made up, and the usual causes of destruction would 
gradually reduce the aggregate quantity of the precious 
metals to its former amount ; after which their production 
would recommence on its former scale. The discovery of 
the treasure would thus produce only temporary effects ; 
namely, a brief disturbance of international trade until the 
treasure had disseminated itself through the world, and 
then a temporary depression in the value of the metal, be- 
low that which corresponds to the cost of producing or of 
obtaining it ; which depression would gradually be cor- 
rected, by a temporarily diminished production in the pro- 
ducing countries, and importation in the importing coun- 
tries. 

The same effects which would thus arise from the dis- 
covery of a treasure, accompany the process by which bank 
notes, or any of the other substitutes for money, take the 
place of the precious metals. Suppose that England pos- 
sessed a currency wholly metallic, of twenty millions ster- 
ling, and that suddenly twenty millions of bank notes were 
sent into circulation. If these were issued by bankers, they 
would be employed in loans, or in the purchase of securities, 
and would therefore create a sudden fall in the rate of in- 
terest, which would probably send a great part of the twenty 
millions of gold out of the country as capital, to seek a 
higher rate of interest elsewhere, before there had been time 
for any action on prices. But we will suppose that the 
notes are not issued by bankers, or money-lenders of any 
kind, but by manufacturers, in the payment of wages and 
the purchase of materials, or by the government in its ordi- 



196 B00K m - CHAPTER XXII. §2. 

nary expenses, so that the whole amount would be rapidly 
carried into the markets for commodities. The following 
would be the natural order of consequences. All prices 
would rise greatly. Exportation would almost cease ; im- 
portation would be prodigiously stimulated. A great bal- 
ance of payments would become due, the exchanges would 
turn against England, to the full extent of the cost- of ex- 
porting money ; and the surplus coin would pour itself 
rapidly forth, over the various countries of the world, in 
the order of their proximity, geographically and commer- 
cially, to England. The efflux would continue until the 
currencies of all countries had come to a level ; by which 
I do not mean, until money became of the same value every- 
where, but until the differences were only those which exist- 
ed before, and which corresponded to permanent differences 
in the cost of obtaining it. When the rise of prices had 
extended itself in an equal degree to all countries, exports 
and imports would everywhere revert to what they were at 
first, would balance one another, and the exchanges would 
return to par. If such a sum of money as twenty millions, 
when spread over the whole surface of the commercial world, 
were sufficient to raise the general level in a perceptible 
degree, the effect would be of no long duration. No alter- 
ation having occurred in the general conditions under which 
the metals were procured, either in the world at large or in 
any part of it, the reduced value would no longer be remu- 
nerating, and the supply from the mines would cease par- 
tially or wholly, until the twenty millions were absorbed ; * 
after which absorption, the currencies of all countries would 
be, in quantity and in value, nearly at their original level. 
I say nearly, for in strict accuracy there would be a slight 
difference. A somewhat smaller annual supply of the pre- 

* I am here supposing a state of things in which gold and silver mining are 
a permanent branch of industry, carried on under known conditions ; and not 
the present state of uncertainty, in which gold-gathering is a game of chance, 
prosecuted (for the present) in the spirit of an adventure, not in that of a regu- 
lar industrial pursuit 



INFLUENCE OF CURRENCY ON FOREIGN TRADE. 197 

cious metals would now be required, there being in the 
world twenty millions less of metallic money undergoing 
waste. The equilibrium of payments, consequently, be- 
tween the mining countries and the rest of the world, would 
thenceforth require that the mining countries should either 
export rather more of something else, or import rather less 
of foreign commodities ; which implies a somewhat lower 
range of prices than previously in the mining countries, and 
a somewhat higher in all others ; a scantier currency in the 
former, and rather fuller currencies in the latter. This 
effect, which would be too trifling to require notice except 
for the illustration of a principle, is the only permanent 
change which would be produced on international trade, 
or on the value or quantity of the currency of any country. 
Effects of another kind, however, will have been pro- 
duced. Twenty millions which formerly existed in the un- 
productive form of metallic money, have been converted 
into what is, or is capable of becoming, productive capital. 
This gain is at first made by England at the expense of 
other countries, who have taken her superfluity of this 
costly and unproductive article off her hands, giving for it 
an equivalent value in other commodities. By degrees the 
loss is made up to those countries by diminished influx from 
the mines, and finally the world has gained a virtual addi- 
tion of twenty millions to its productive resources. Adam 
Smith's illustration, though so well known, deserves for its 
extreme aptness to be once more repeated. He compares 
the substitution of paper in the room of the precious metals, 
to the construction of a highway through the air, by which 
the ground now occupied by roads would become available 
for agriculture. As in that case a portion of the soil, so in 
this a part of the accumulated wealth of the country, would 
be relieved from a function in which it was only employed 
in rendering other soils and capitals productive, and would 
itself become applicable to production ; the office it pre- 
viously fulfilled being equally well discharged by a medium 
which costs nothing. 



i9g BOOK III. CHAPTER XXII. §2. 

The value saved to the community by thus dispensing 
with metallic money, is a clear gain to those who provide 
the substitute. They have the use of twenty millions of 
circulating medium which have cost them only the expense 
of an engraver's plate. If they employ this accession to 
their fortunes as productive capital, the produce of the 
country is increased and the community benefited, as much 
as by any other capital of equal amount. Whether it is so 
employed or not, depends, in some degree, upon the mode 
of issuing it. If issued by the government, and employed 
in paying off debt, it would probably become productive 
capital. The government, however, may prefer employing 
this extraordinary resource in its ordinary expenses ; may 
squander it uselessly, or make it a mere temporary substi- 
tute for taxation to an equivalent amount ; in which last 
case the amount is saved by the taxpayers at large, who 
either add it to their capital or spend it as income. When 
paper currency is supplied, as in our own country, by 
bankers and banking companies, the amount is almost 
wholly turned into productive capital : for the issuers, be- 
ing at all times liable to be called upon to refund the value, 
are under the strongest inducements not to squander it, and 
the only cases in which it is not forthcoming are cases of 
fraud or mismanagement. A banker's profession being that 
of a money-lender, his issue of notes is a simple extension 
of -his ordinary occupation. He lends the amount to farmers, 
manufacturers, or dealers, who employ it in their several 
businesses. So employed, it yields, like any other capital, 
wages of labour and profits of stock. The profit is shared 
between the banker, who receives interest, and a succession 
of borrowers, mostly for short periods, who after paying the 
interest, gain a profit in addition, or a convenience equiva- 
lent to profit. The capital itself in the long run becomes 
entirely wages, and when replaced by the sale of the pro- 
duce, becomes wages again ; thus affording a perpetual fund, 
of the value of twenty millions, for the maintenance of pro- 
ductive labour, and increasing the annual produce of the 



INFLUENCE OF CURRENCY ON FOREIGN TRADE. 199 

country by all that can be produced through the means of 
a capital of that value. To this gain must be added a fur- 
ther saving to the country, of the annual supply of the pre- 
cious metals necessary for repairing the wear and tear, and 
other waste, of a metallic currency. 

The substitution, therefore, of paper for the precious 
metals, should always be carried as far as is consistent with 
safety ; no greater amount of metallic currency being re- 
tained, than is necessary to maintain, both in fact and in 
public belief, the convertibility of the paper. A country 
with the extensive commercial relations of England, is liable 
to be suddenly called upon for large foreign payments, some- 
times in loans, or other investments of capital abroad, some- 
times as the price of some unusual importation of goods, the 
most frequent case being that of large importations of food 
consequent on a bad harvest. To meet such demands it is 
necessary that there should be, either in circulation or in 
the coffers of the banks, coin or bullion to a very consider- 
able amount, and that this, when drawn out by any emer- 
gency, should be allowed to return after the emergency is 
past. But since gold wanted for exportation is almost in- 
variably drawn from the reserves of the banks, and is never 
likely to be taken directly from the circulation while the 
banks remain solvent, the only advantage which can be ob- 
tained from retaining partially a metallic currency for daily 
purposes is, that the banks may occasionally replenish their 
reserves from it. 

§ 3. When metallic money had been entirely super- 
seded and expelled from circulation, by the substitution of 
an equal amount of bank notes, any attempt to keep a still 
further quantity of paper in circulation must, if the notes 
are convertible, be a complete failure. The new issue would 
again set in motion the same train of consequences by which 
the gold coin had already been expelled. The metals would, 
as before, be required for exportation, and would be for that 
purpose demanded from the banks, to the full extent of the 



200 B00K IIL CHAPTER XXII. §3. 

superfluous notes ; which thus could not possibly be retained 
in circulation. If, indeed, the notes were inconvertible, 
there would be no such obstacle to the increase of their 
quantity. An inconvertible paper acts in the same way as 
a convertible, while there remains any coin for it to super- 
sede : the difference begins to manifest itself when all the 
coin is driven from circulation (except what may be retained 
for the convenience of small change), and the issues still go 
on increasing. When the paper begins to exceed in quan- 
tity the metallic currency which it superseded, prices of 
course rise ; things which were worth 51. in metallic money, 
became worth 61. in inconvertible paper, or more, as the 
case may be. But this rise of price will not, as in the cases 
before examined, stimulate import, and discourage export. 
The imports and exports are determined by the metallic 
prices of things, not by the paper prices: and it is only 
when the paper is exchangeable at pleasure for the metals, 
that paper prices and metallic prices must correspond. 

Let us suppose that England is the country which has 
the depreciated paper. Suppose that some English produc- 
tion could be bought, while the currency was still metallic, 
for 51., and sold in France for 51. 10s., the difference cover- 
ing the expense and risk, and affording a profit to the mer- 
chant. On account of the depreciation, this commodity 
will now cost in England 61., and cannot be sold in France 
for more than 51. 10s., and yet it will be exported as before. 
Why ? Because the 51. 10s. which the exporter can get for 
it in France, is not depreciated paper, but gold or silver : 
and since in England bullion has risen, in the same propor- 
tion with other things — if the merchant brings the gold or 
silver to England, he can sell his 51. 10s. for 61. 12s., and 
obtain as before 10 per cent for profit and expenses. 

It thus appears, that a depreciation of the currency does 
not affect the foreign trade of the country : this is carried 
on precisely as if the currency maintained its value. But 
though the trade is not affected, the exchanges are. When 
the imports and exports are in equilibrium, the exchange, 



INFLUENCE OF CURRENCY ON FOREIGN TRADE. 201 

in a metallic currency, would be at par ; a bill on France 
for the equivalent of five sovereigns, would be worth five 
sovereigns. But five sovereigns, or the quantity of gold 
contained in them, having come to be worth in England 61., 
it follows that a bill on France for 51. will be worth 61. 
When, therefore, the real exchange is at par, there will be 
a nominal exchange against the country, of as much per 
cent as the amount of the depreciation. If the currency is 
depreciated 10, 15, or 20 per cent, then in whatever way 
the real exchange, arising from the variations of interna- 
tional debts and credits, may vary, the quoted exchange 
will always differ 10, 15, or 20 per cent from it. However 
high this nominal premium may be, it has no tendency to 
send gold out of the country, for the purpose of drawing 
a bill against it and profiting by the premium ; because the 
gold s,o sent must be procured, not from the banks and at 
par, as in the case of a convertible currency, but in the 
market, at an advance of price equal to the premium. In 
such cases, instead of saying that the exchange is unfavour- 
able, it would be a more correct representation to say that 
the par has altered, since there is now required a larger 
quantity of English currency to be equivalent to the same 
quantity of foreign. The exchanges, however, continue to 
be computed according to the metallic par. The quoted 
exchanges, therefore, when there is a depreciated currency, 
are compounded of two elements or factors ; the real ex- 
change, which follows the variations of international pay- 
ments, and the nominal exchange, which varies with the 
depreciation of the currency, but which, while there is any 
depreciation at all, must always be unfavourable. Since 
the amount of depreciation is exactly measured by the de- 
gree in which the market price of bullion exceeds the mint 
valuation, we have a sure criterion to determine what por- 
tion of the quoted exchange, being referable to depreciation, 
may be struck off as nominal ; the result so corrected ex- 
pressing the real exchange. 

The same disturbance of the exchanges and of interna- 



202 BOOK III. CHAPTER XXII. §3. 

tional trade, which is produced by an increased issue of con- 
vertible bank notes, is in like manner produced by those 
extensions of credit, which, as was so fully shown in a pre- 
ceding chapter, have the same effect on prices as an increase 
of the currency. Whenever circumstances have given such 
an impulse to the spirit of speculation as to occasion a great 
increase of purchases on credit, money prices rise, just as 
much as they would have risen if each person who so buys 
on credit had bought with money. All the effects, there- 
fore, must be similar. As a consequence of high prices, 
exportation is checked and importation stimulated ; though 
in fact the increase of importation seldom waits for the rise 
of prices which is the consequence of speculation, inasmuch 
as some of the great articles of import are usually among 
the things in which speculative overtrading first shows it- 
self. There is, therefore, in such periods, usually a great 
excess of imports over exports ; and when the time comes 
at which these must be paid for, the exchanges become un- 
favourable, and gold flows out of the country. In what pre- 
cise manner this efflux of gold takes effect on prices, de- 
pends on circumstances of which we shall presently speak 
more fully ; but that its effect is to make them recoil down- 
wards, is certain and evident. The recoil once begun, gen- 
erally becomes a total rout, and the unusual extension of 
credit is rapidly exchanged for an unusual contraction of it. 
Accordingly, when credit has been imprudently stretched, 
and the speculative spirit carried to excess, the turn of the 
exchanges, and consequent pressure on the banks to obtain 
gold for exportation, are generally the proximate cause of 
the catastrophe. But these phenomena, though a conspicu- 
ous accompaniment, are no essential part, of the collapse of 
credit called a commercial crisis ; which, as we formerly 
showed,* might happen to as great an extent, and is quite as 
likely to happen, in a country, if any such there were, alto- 
gether destitute of foreign trade. 

* Supra, pp. 68—71, 



CHAPTER XXHI. 

OF THE RATE OF INTEREST. 

§ 1. The present seems the most proper place for dis- 
cussing the circumstances which determine the rate of in- 
terest. The interest of loans, being really a question of 
exchange value, falls naturally into the present division of 
our subject : and the two topics of Currency and Loans, 
though in themselves distinct, are so intimately blended in 
the phenomena of what is called the money market, that it 
is impossible to understand the one without the other, and 
m many minds the two subjects are mixed up in the most 
inextricable confusion. 

In the preceding Book* we denned the relation in which 
interest stands to profit. We found that the gross profit of 
capital might be distinguished into three parts, which are 
respectively the remuneration for risk, for trouble, and for 
the capital itself, and may be termed insurance, wages of 
superintendence, and interest. After making compensation 
for risk, that is, after covering the average losses to which 
capital is exposed either by the general circumstances of 
society or by the hazards of the particular employment, 
there remains a surplus, which partly goes to repay the 
owner of the capital for his abstinence, and partly the em- 
ployer of it for his time and trouble. How much goes to 
the one and how much to the other, is shown by the amount 

* Supra, book ii. chap. xv. § 1. 



204 BOOK III. CHAPTER XXIII. §1. 

of the remuneration which, when the two functions are sepa- 
rated, the owner of capital can obtain from the employer 
for its use. This is evidently a question of demand and 
supply. Nor have demand and supply any different mean- 
ing or effect in this case from what they have in all others. 
The rate of interest will be such as to equalize the demand 
for loans with the supply of them. It will be such, that 
exactly as much as some people are desirous to borrow at 
that rate, others shall be willing to lend. If there is more 
offered than demanded, interest will fall ; if more is de- 
manded than offered, it will rise ; and in both cases, to the 
point at which the equation of supply and demand is re- 
established. 

Both the demand and supply of loans fluctuate more 
incessantly than any other demand or supply whatsoever. 
The fluctuations in other things depend on a limited num- 
ber of influencing circumstances ; but the desire to bor- 
row, and the willingness to lend, are more or less influenced 
by every circumstance which affects the state or prospects 
of industry or commerce, either generally or in any of their 
branches. The rate of interest, therefore, on good security, 
which alone we have here to consider (for interest in which 
considerations of risk bear a part may swell to any amount) 
is seldom, in the great centres of money transactions, pre- 
cisely the same for two days together ; as is shown by the 
never-ceasing variations in the quoted prices of the funds 
and other negotiable securities. Nevertheless, there must 
be, as in other cases of value, some rate which (in the lan- 
guage of Adam Smith and Ricardo) may be called the natu- 
ral rate ; some rate about which the market rate oscillates, 
and to which it always tends to return. This rate partly 
depends on the amount of accumulation going on in the 
hands of persons who cannot themselves attend to the em- 
ployment of their savings, and partly on the comparative 
taste existing in the community for the active pursuits of 
industry, or for the leisure, ease, and independence of an 
annuitant. 



RATE OF INTEREST. 205 

§ 2. To exclude casual fluctuations, we will suppose 
commerce to be in a quiescent condition, no employment 
being unusually prosperous, and none particularly distressed. 
In these circumstances, the more thriving producers and 
traders have their capital fully employed, and many are 
able to transact business to a considerably greater extent 
than they have capital for. These are naturally borrowers : 
and the amount which they desire to borrow, and can give 
security for, constitutes the demand for loans on account of 
productive employment. To these must be added the loans 
required by Government, and by landowners, or other un- 
productive consumers who have good security to give. This 
constitutes the mass of loans for which there is an habitual 
demand. 

Now it is conceivable that there might exist, in the 
hands of persons disinclined or disqualified for engaging 
personally in business, a mass of capital equal to, and even 
exceeding, this demand. In that case there would be an 
habitual excess of competition on the part of lenders, and 
the rate of interest would bear a low proportion to the rate 
of profit. Interest would be forced down to the point which 
would either tempt borrowers to take a greater amount of 
loans than they had a reasonable expectation of being able 
to employ in their business, or would so discourage a portion 
of the lenders, as to make them either forbear to accumulate, 
or endeavour to increase their income by engaging in busi- 
ness on their own account, and incurring the risks, if not 
the labours, of industrial employment. 

On the other hand, the capital owned by persons who 
prefer lending it at interest, or whose avocations prevent 
them from personally superintending its employment, may 
be short of the habitual demand for loans. It may be in 
great part absorbed by the investments afforded by the pub- 
lic debt and by mortgages, and the remainder may not be 
sufficient to supply the wants of commerce. If so, the rate 
of interest will be raised so high as in some way to re-estab- 
lish the equilibrium. When there is only a small difference 



206 BOOK in. CHAPTER XXIII. §2. 

between interest and profit, many borrowers may no longer 
be willing to increase their responsibilities and involve their 
credit for so small a remuneration : or some who would 
otherwise have engaged in business, may prefer leisure, and 
become lenders instead of borrowers : or others, under the 
inducement of high interest and easy investment for their 
capital, may retire from business earlier, and with smaller 
fortunes, than they otherwise would have done. Or, lastly, 
there is another process by which, in England and other 
commercial countries, a large portion of the requisite supply 
of loans is obtained. Instead of its being afforded by per- 
sons not in business, the affording it may itself become a 
business. A portion of the capital employed in trade may 
be supplied by a class of professional money lenders. These 
money lenders, however, must have more than a mere in- 
terest ; they must have the ordinary rate of profit on their 
capital, risk and all other circumstances being allowed for. 
But it can never answer to any one who borrows for the 
purposes of his business, to pay a full profit for capital from 
which he will only derive a full profit : and money-lend- 
ing, as an employment, for the regular supply of trade, can- 
not, therefore, be carried on except by persons who, in 
addition to their own capital, can lend their credit, or, in 
other words, the capital of other people : that is, bankers, 
and persons (such as bill-brokers) who are virtually bankers, 
since they receive money in deposit. A bank which lends 
its notes, lends capital which it borrows from the commu- 
nity, and for which it pays no interest. A bank of deposit 
lends capital which it collects from the community in small 
parcels ; sometimes without paying any interest, as is the 
case with the London private bankers ; and if, like the 
Scotch, the joint stock, and most of the country banks, it 
does pay interest, it still pays much less than it receives ; 
for the depositors, who in any other way could mostly ob- 
tain for such small balances no interest worth taking any 
trouble for, are glad to receive even a little. Having this 
subsidiary resource, bankers are enabled to obtain, by lend- 



RATE OF INTEREST. 207 

ing at interest, the ordinary rate of profit on their own 
capital. In any other manner, money-lending could not 
be carried on as a regular mode of business, except upon 
terms on which none would consent to borrow but persons 
either counting on extraordinary profits, or in urgent need ; 
unproductive consumers who have exceeded their means, 
or merchants in fear of bankruptcy. The disposable capital 
deposited in banks, or represented by bank notes, together 
with the funds belonging to those who, either from neces- 
sity or preference, live upon the interest of their property, 
constitute the general loan fund of the country : and the 
amount of this aggregate fund, when set against the habit- 
ual demands of producers and dealers, and those of the gov- 
ernment and of unproductive consumers, determine the 
permanent or average rate of interest ; which must always 
be such as to adjust these two amounts to one another.* 
But while the whole of this mass of lent capital takes effect 
upon the permanent rate of interest, ike fluctuations depend 
almost entirely upon the portion which is in the hands of 
bankers ; for it is that portion almost exclusively, which, 
being lent for short times only, is continually in the market 
seeking an investment. The capital of those who live on 
the interest of their own fortunes, has generally sought and 
found some fixed investment, such as the public funds, 
mortgages, or the bonds of public companies, which invest- 
ment, except under peculiar temptations or necessities, is 
not changed. 

* I do not include in the general loan fund of the country the capitals, large 
as they sometimes are, which are habitually employed in speculatively buying 
and selling the public funds and other securities. It is true that all who buy 
securities add, for the time, to the general amount of money on loan, and lower 
pro tanto the rate of interest. But as the persons I speak of buy only to sell 
again at a higher price, they are alternately in the position of lenders and of 
borrowers: their operations raise the rate of interest at one time, exactly as 
much as they lower it at another. Like all persons who buy and sell on specu- 
lation, their function is to equalize, not to raise or lower, the value of the com- 
modity. When they speculate prudently, they temper the fluctuations of price ; 
when imprudently, they often aggravate them. 



208 B00K HI. CHAPTER XXIII. §». 

§ 3. Fluctuations in the rate of interest arise from 
variations either in the demand for loans, or in the supply. 
The supply is liable to variation, though less so than the 
demand. The willingness to lend is greater than usual at 
the commencement of a period of speculation, and much less 
than usual during the revulsion which follows. In specu- 
lative times, money-lenders as well as other people are in- 
clined to extend their business by stretching their credit ; 
they lend more than usual (just as other classes of dealers 
and producers employ more than usual) of capital which 
does not belong to them. Accordingly, these are the times 
when the rate of interest is low ; though for this too (as we 
shall immediately see) there are other causes. During the 
revulsion, on the contrary, interest always rises inordinately, 
because, while there is a most pressing need on the part of 
many persons to borrow, there is a general disinclination 
to lend. This disinclination, when at its extreme point, is 
called a panic. It occurs when a succession of unexpected 
failures has created in the mercantile, and sometimes also in 
the non-mercantile public, a general distrust in each other's 
solvency ; disposing every one not only to refuse fresh credit, 
except on very onerous terms, but to call in, if possible, all 
credit which he has already given. Deposits are withdrawn 
from banks ; notes are returned on the issuers in exchange 
for specie ; bankers raise their rate of discount, and with- 
hold their customary advances ; merchants refuse to renew 
mercantile bills. At such times the most calamitous con- 
sequences were formerly experienced from the attempt of 
the law to prevent more than a certain limited rate of in- 
terest from being given or taken. Persons who could not 
borrow at five per cent, had to pay, not six or seven, but 
ten or fifteen per cent, to compensate the lender for risking 
the penalties of the law : or had to sell securities or goods 
for ready money at a still greater sacrifice. 

Except at such periods, the amount of capital disposable 
on loan is subject to little other variation than that which 
arises from the gradual process of accumulation; which 



RATE OF INTEREST. 209 

process, however, in the great commercial countries, is 
sufficiently rapid to account for the almost periodical re- 
currence of these fits of speculation ; since, when a few 
years have elapsed without a crisis, and no new and tempt- 
ing channel for investment has been opened in the mean- 
time, there is always found to have occurred in those few 
years so large an increase of capital seeking investment, as 
to have lowered considerably the rate of interest, whether 
indicated by the prices of securities or by the rate of dis- 
count on bills ; and this diminution of interest tempts the 
possessors to incur hazards in hopes of a more considerable 
return. 

The demand for loans varies much more largely than 
the supply, and embraces longer cycles of years in its ab- 
errations. A time of war, for example, is a period of 
unusual drafts on the loan market. The Government, at 
such times, generally incurs new loans, and as these usually 
succeed each other rapidly as long as the war lasts, the 
general rate of interest is kept higher in war than in peace, 
without reference to the rate of profit, and productive in- 
dustry is stinted of its usual supplies. During part of the 
last French war, the government could not borrow under 
six per cent, and of course all other borrowers had to pay 
at least as much. Nor does the influence of these loans 
altogether cease when the government ceases to contract 
others ; for those already contracted continue to afford an 
investment for a greatly increased amount of the disposable 
capital of the country, which, if the national debt were paid 
off, would be added to the mass of capital seeking invei st- 
ment, and (independently of temporary disturbance) could 
not but, to some extent, permanently lower the rate of in- 
terest. 

The same effect on interest which is produced by gov- 
ernment loans for war expenditure, is produced by the sud- 
den opening of any new and generally attractive mode of 
permanent investment. The only instance of the kind in 
recent history on a scale comparable to that of the war 
53 



210 BOOK III. CHAPTER XXlII. §4. 

loans, is the absorption of capital in the construction of rail- 
ways. This capital must have been principally drawn from 
the deposits in banks, or from savings which would have 
gone into deposit, and which were destined to be ultimately 
employed in buying securities from persons who would have 
employed the purchase money in discounts or other loans at 
interest : in either case, it was a draft on the general loan 
fund. It is, in fact, evident, that unless savings were made 
expressly to be employed in railway adventure, the amount 
thus employed must have been derived either from the 
actual capital of persons in business, or from capital which 
would have been lent to persons in business. In the first 
case, the subtraction, by crippling their means, obliges 
them to be larger borrowers ; in the second, it leaves less 
for them to borrow ; in either case it equally tends to raise 
the rate of interest. 

§ 4. From the preceding considerations it would be 
seen, even if it were not otherwise evident, how great an 
error it is to imagine that the rate of interest bears any 
necessary relation to the quantity or value of the money in 
circulation. An increase of the currency has in itself no 
effect, and is incapable of having any effect, on the rate of 
interest. A paper currency issued by government in the 
payment of its ordinary expenses, in however great excess 
it may be issued, affects the rate of interest in no manner 
whatever. It diminishes indeed the power of money to 
buy commodities, but not the power of money to buy money. 
If a hundred pounds will buy a perpetual annuity of four 
pounds a year, a depreciation which makes the hundred 
pounds worth only half as much as before, has precisely the 
same effect on the four pounds, and therefore cannot alter 
the relation between the two. Unless, indeed, it is known 
and reckoned upon that the depreciation will only be tem- 
porary ; for people certainly might be willing to lend the 
depreciated currency on cheaper terms if they expected to 
be repaid in money of full value. 



RATE OF INTEREST. 211 

It is perfectly true that in England, and in most other 
commercial countries, an addition to the currency almost 
always seems to have the effect of lowering the rate of in- 
terest ; because it is almost always accompanied by some- 
thing which really has that tendency. The currency in 
common use, being a currency provided by bankers, is all 
issued in the way of loans, except such part as happens to 
be employed in the purchase of gold and silver. The same 
operation, therefore, which adds to the currency, also adds 
to the loans, or to the capital seeking investment on loan ; 
properly, indeed, the currency is only increased in order 
that the loans may be increased. Now, though as currency 
these issues have not an affect on interest, as loans they 
have. Inasmuch therefore as an expansion or contraction 
of paper currency, when that currency consists of bank 
notes, is always also an expansion or contraction of credit ; 
the distinction is seldom properly drawn between the effects 
which belong to it in the former and in the latter character. 
The confusion is thickened by the unfortunate misapplica- 
tion of language, which designates the rate of interest by 
a phrase (" the value of money ") which properly expresses 
the purchasing power of the circulating medium. Not 
only, therefore, are bank notes supposed to produce effects 
as currency, which they only produce as loans, but atten- 
tion is habitually diverted from effects similar in kind and 
much greater in degree, when produced by an action on 
loans which does not happen to be accompanied by any 
action on the currency. 

For example, in considering the effect produced by the 
proceedings of banks in encouraging the excesses of specu- 
lation, an immense effect is usually attributed to their issues 
of notes, but until of late hardly any attention was paid to 
the management of their deposits, though nothing is more 
certain than that their imprudent extensions of credit take 
place more frequently by means of their deposits than of 
their issues. " There is no doubt," says Mr. Tooke,* " that 

* Inquiry into the Currency Principle, chap. xiv. 



212 BOOK III. CHAPTER XXIII. §4. 

banks, whether private or joint stock, may, if imprudently 
conducted, minister to an undue extension of credit for the 
purpose of speculations, whether in commodities, or in over- 
trading in exports or imports, or in building or mining 
operations, and that they have so ministered not unfre- 
quently, and in some cases to an extent ruinous to them- 
selves, and without ultimate benefit to the parties to whose 
views their resources were made subservient." But, " sup- 
posing all the deposits received by a banker to be in coin, 
is he not, just as much as the issuing banker, exposed to the 
importunity of customers, whom it may be impolitic to re- 
fuse, for loans or discounts, or to be tempted by a high 
interest ? and may he not be induced to encroach so much 
upon his deposits as to leave him, under not improbable 
circumstances, unable to meet the demands of his depos- 
itors ? In what respect, indeed, would the case of a banker 
in a perfectly metallic circulation, differ from that of a 
London banker at the present day ? He is not a creator 
of money, he cannot avail himself of his privilege as an 
issuer in aid of his other business, and yet there have been 
lamentable instances of London bankers issuing money in 
excess." 

In the discussions, too, which have been for so many 
years carried on respecting the operations of the Bank of 
England, and the effects produced by those operations on 
the state of credit, though for nearly half a century there 
never has been a commercial crisis which the Bank has not 
been strenuously accused either of producing or of aggra- 
vating, it has been almost universally assumed that the 
influence of its acts was felt only through the amount of its 
notes in circulation, and that if it could be prevented from 
exercising any discretion as to that one feature in its posi- 
tion, it would no longer have any power liable to abuse. 
This at least is an error which, after the experience of the 
year 1847, we may hope has been committed for the last 
time. During that year the hands of the bank were abso- 
lutely tied, in its character of a bank of issue ; but through 



RATE OF INTEREST. 213 

its operations as a bank of deposit it exercised as great an 
influence, or apparent influence, on the rate of interest and 
the state of credit, as at any former period ; it was exposed 
to as vehement accusations of abusing that influence ; and 
a crisis occurred, such as few that preceded it had equalled, 
and none perhaps surpassed, in intensity. 

§ 5. Before quitting the general subject of this chap- 
ter, I will make the obvious remark, that the rate of interest 
determines the value and price of all those saleable articles 
which are desired and bought, not for themselves, but for 
the income which they are capable of yielding. The pub- 
lic funds, shares in joint stock companies, and all descrip- 
tions of securities, are at a high price in proportion as the 
rate of interest is low. They are sold at the price which 
will give the market rate of interest on the purchase money, 
with allowance for all differences in the risk incurred, or in 
any circumstance of convenience. Exchequer bills, for ex- 
ample, usually sell at a higher price than consols, propor- 
tionally to the interest which they yield ; because, though 
the security is the same, yet the former being annually paid 
off at par unless renewed by the holder, the purchaser 
(unless obliged to sell in a moment of general emergency,) 
is in no danger of losing anything by the resale, except the 
premium he may have paid. 

The price of land, mines, and all other fixed sources of 
income, depends in like manner on the rate of interest. 
Land usually sells at a higher price, in proportion to the 
income afforded by it, than the public funds, not only be- 
cause it is thought, even in this country, to be somewhat 
more secure, but because ideas of power and dignity are 
associated with its possession. But these differences are 
constant, or nearly so ; and in the variations of price, land 
follows, cceteris paribus, the permanent (though of course 
not the daily) variations of the rate of interest. When 
interest is low, land will naturally be dear ; when interest 
is high, land will be cheap. The last long war presented 



214 B00K nI - CHAPTER XXin. §5. 

a striking exception to this rule, since the price of land as 
well as the rate of interest was then remarkably high. For 
this, however, there was a special cause. The continuance 
of a very high average price of corn for many years, had 
raised the rent of land even more than in proportion to the 
rise of interest and fall of the selling price of fixed incomes. 
Had it not been for this accident, chiefly dependent on the 
seasons, land must have sustained as great a depreciation 
in value as the public funds : which it probably would do, 
were a similar war to break out hereafter ; to the signal 
disappointment of those landlords and farmers who, gen- 
eralizing from the casual circumstances of a remarkable 
period, so long persuaded themselves that a state of war 
was peculiarly advantageous, and a state of peace disadvan- 
tageous, to what they chose to call the interests of agricul- 
ture. 



CHAPTER XXIV. 

OF THE REGULATION OF A CONVERTIBLE PAPER 
CURRENCY. 

§ 1. The frequent recurrence during the last half cen- 
tury of the painful series of phenomena called a commercial 
crisis, has directed much of the attention both of economists 
and of practical politicians to the contriving of expedients 
for averting, or at the least, mitigating its evils. And the 
habit which grew up during the era of the Bank restriction, 
of ascribing all alterations of high and low prices to the 
issues of banks, has caused inquirers in general to fix their 
hopes of success in moderating those vicissitudes, upon 
schemes for the regulation of bank notes. A scheme of this 
nature, after having obtained the sanction of high authori- 
ties, so far established itself in the public mind, as to be, 
with general approbation, converted into a law, at the re- 
newal of the Charter of the Bank of England in 1844 : and 
the regulation is still in force, though with a great abate- 
ment of its popularity, and with its prestige impaired by 
two temporary suspensions, on the responsibility of the 
executive, the earlier of the two little more than three years 
after its enactment. It is proper that the merits of this plan 
for the regulation of a convertible bank note currency should 
be here considered. Before touching upon the practical 
provisions of Sir Robert Peel's Act of 1844, I shall briefly 
state the nature, and examine the grounds, of the theory on 
which it is founded. 

It is believed by many, that banks of issue universally, 



216 BOOK III. CHAPTER XXIV. §]. 

or the Bank of England in particular, have a power of throw- 
ing their notes into circulation, and thereby raising prices, 
arbitrarily ; that this power is only limited by the degree 
of moderation with which they think fit to exercise it ; that 
when they increase their issues beyond the usual amount, 
the rise of prices, thus produced, generates a spirit of specu- 
lation in commodities, which carries prices still higher, and 
ultimately causes a reaction and recoil, amounting in ex- 
treme cases to a commercial crisis ; and that every such 
crisis which has occurred in this country within mercantile 
memory, has been either originally produced by this cause, 
or greatly aggravated by it. To this extreme length the 
currency theory has not been carried by the eminent politi- 
cal economists who have given to a more moderate form of 
the same theory the sanction of their names. But I have 
not overstated the extravagance of the popular version ; 
which is a remarkable instance to what lengths a favourite 
theory will hurry, not the closet students whose competency 
in such questions is often treated with so much contempt, 
but men of the world and of business, who pique themselves 
on the practical knowledge which they have at least had 
ample opportunities of acquiring. Not only has this fixed 
idea of the currency as the prime agent in the fluctuations 
of price, made them shut their eyes to the multitude of cir- 
cumstances which, by influencing the expectation of supply, 
are the true causes of almost all speculations and of almost 
all fluctuations of price ; but in order to bring about the 
chronological agreement required by their theory, between 
the variations of bank issues and those of prices, they have 
played such fantastic tricks with facts and dates as would 
be thought incredible, if an eminent practical authority had 
not taken the trouble of meeting them, on the ground of 
mere history, with an elaborate exposure. I refer, as all con- 
versant with the subject must be aware, to Mr. Tooke's His- 
tory of Prices. The result of Mr. Tooke's investigations was 
thus stated by himself, in his examination before the Commons 
Committee on the Bank Charter question in 1832 ; and the 



REGULATION OF CURRENCY. 217 

evidences of it stand recorded in his book : " In point of 
fact, and historically, as far as my researches have gone, 
in every signal instance of a rise or fall of prices, the rise or 
fall has preceded, and therefore could not be the effect of, 
an enlargement or contraction of the bank circulation." 

The extravagance of the currency theorists, in attribut- 
ing almost every rise or fall of prices to an enlargement or 
contraction of the issues of bank notes, has raised up, by 
reaction, a theory the extreme opposite of the former, of 
which, in scientific discussion, the most prominent repre- 
sentatives are Mr. Tooke and Mr. Fullarton. This counter- 
theory denies to bank notes, so long as their convertibility 
is maintained, any power whatever of raising prices, and to 
banks any power of increasing their circulation, except as 
a consequence of, and in proportion to, an increase of the 
business to be done. This last statement is supported by 
the unanimous assurances of all the country bankers who 
have been examined before successive Parliamentary Com- 
mittees on the subject. They all bear testimony that (in 
the words of Mr. Fullarton*) " the amount of their issues 
is exclusively regulated by the extent of local dealings and 
expenditure in their respective districts, fluctuating with 
the fluctuations of production and price, and that they 
neither can increase their issues beyond the limits which 
the range of such dealings and expenditure prescribes, with- 
out the certainty of having their notes immediately returned 
to them, nor diminish them, but at an almost equal certainty 
of the vacancy being filled up from some other source." 
From these premises it is argued by Mr. Tooke and Mr. 
Fullarton, that bank issues, since they cannot be increased 
in amount unless there be an increased demand, cannot pos- 
sibly raise prices ; cannot encourage speculation, nor occa- 
sion a commercial crisis ; and that the attempt to guard 
against that evil by an artificial management of the issue 
of notes, is of no effect for the intended purpose, and liable 
to produce other consequences extremely calamitous. 

* Regulation of Currencies, p. 85. 



218 BOOK III. CHAPTER XXIV. §2. 

§ 2. As much of this doctrine as rests upon testimony, 
and not upon inference, appears to me incontrovertible. I 
give complete credence to the assertion of the country bank- 
ers, very clearly and correctly condensed into a small com- 
pass in the sentence just quoted from Mr. Fullarton. I am 
convinced that they cannot possibly increase their issue of 
notes in any other circumstances than those which are there 
stated. I believe, also, that the theory, grounded by Mr. 
Fullarton upon this fact, contains a large portion of truth, 
and is far nearer to being the expression of the whole, truth 
than any form whatever of the currency theory. 

There are two states of the markets : one which may be 
termed the quiescent state, the other the expectant, or specu- 
lative state. The. first is that in which there is nothing 
tending to engender in any considerable portion of the mer- 
cantile public a desire to extend their operations. The pro- 
ducers produce and the dealers purchase only their usual 
stocks, having no expectation of a more than usually rapid 
vent for them. Each person transacts his ordinary amount 
of business and no more, or increases it only in correspond- 
ence with the increase of his capital or connexion, or with 
the gradual growth of the demand for his commodity, occa- 
sioned by the public prosperity. Not meditating any unusual 
extension of their own operations, producers and dealers do 
not need more than the usual accommodation from bankers 
and other money lenders ; and as it is only by extending 
their loans that bankers increase their issues, none but a 
momentary augmentation of issues is in these circumstances 
possible. If at a certain time of the year a portion of the 
public have larger payments to make than at other times, or 
if an individual, under some peculiar exigency, requires an 
extra advance, they may apply for more bank notes, and 
obtain them ; but the notes will no more remain in circulation, 
than the extra quantity of Bank of England notes which are 
issued once in every three months in payment of the divi- 
dends. The person to whom, after being borrowed, the notes 
are paid away, has no extra payments to make, and no pe- 



REGULATION OF CURRENCY. 219 

euliar exigency, and he keeps them by him unused, or sends 
them into deposit, or repays with them a previous advance 
made to him by some banker : in any case he does not buy 
commodities with them, since by the supposition there is no- 
thing to induce him to lay in a larger stock of commodities 
than before. Even if we suppose, as we may do, that bankers 
create an artificial increase of the demand for loans, by offer- 
ing them below the market rate of interest, the notes they 
issue will not remain in circulation ; for when the borrower, 
having completed the transaction for which he availed him- 
self of them, has paid them away, the creditor or dealer who 
receives them, having no demand for the immediate use 
of an extra quantity of notes, sends them into deposit. 
In this case, therefore, there can be no addition, at the 
discretion of bankers, to the general circulating medium : 
any increase of their issues either comes back to them, or 
remains idle in the hands of the public, and no rise takes 
place in prices. 

But there is another state of the markets, strikingly con- 
trasted with the preceding, and to this state it is not so 
obvious that the theory of Mr. Tooke and Mr. Fullarton is 
applicable ; namely, when an impression prevails, whether 
well founded or groundless, that the supply of one or more 
great articles of commerce is likely to fall short of the ordi- 
nary consumption. In such circumstances all persons con- 
nected with those commodities desire to extend their oper- 
ations. The producers or importers desire to produce or 
import a larger quantity, speculators desire to lay in a stock 
in order to profit by the expected rise of price, and holders 
of the commodity desire additional advances to enable them 
to continue holding. All these classes are disposed to make 
a more than ordinary use of their credit, and to this desire it 
is not denied that bankers very often unduly administer. 
Effects of the same kind may be produced by anything 
which, exciting more than usual hopes of profit, gives 
increased briskness to business: for example, a sudden 
foreign demand for commodities on a large scale, or the 



220 BOOK III. CHAPTER XXIV. §2. 

expectation of it ; such as occurred on the opening of Spanish 
America to English trade, and has occurred on various occa- 
sions in the trade with the United States. Such occurrences 
produce a tendency to a rise of price in exportable articles, 
and generate speculations, sometimes of a reasonable, and 
(as long as a large proportion of men in business prefer 
excitement to safety) frequently of an irrational or immod- 
erate character. In such cases there is a desire in the mer- 
cantile classes, or in some portion of them, to employ their 
credit, in a more than usual degree, as a power of purchasing. 
This is a state of business which, when pushed to an extreme 
length, brings on the revulsion called a commercial crisis ; 
and it is a known fact that such periods of speculation hardly 
ever pass off without having been attended, during some 
part of their progress, by a considerable increase of bank 
notes. 

To this, however, it is replied by Mr. Tooke and Mr. 
Fullarton, that the increase of the circulation always follows 
instead of preceding the rise of prices, and is not its cause, 
but its effect. That in the first place, the speculative pur- 
chases by which prices are raised, are not affected by bank 
notes but by cheques, or still more commonly on a simple 
book credit : and secondly, even if they were made with bank 
notes borrowed for that express purpose from bankers, the 
notes, after being used for that purpose, would, if not wanted 
for current transactions, be returned into deposit by the per- 
sons receiving them. In this I fully concur, and I regard it 
as proved, both scientifically and historically, that during the 
ascending period of speculation, and as long as it is confined 
to transactions between dealers, the issues of bank notes are 
seldom materially increased, nor contribute anything to the 
speculative rise of prices. It seems to me, however, that 
this can no longer be affirmed when speculation has pro- 
ceeded so far as to reach the producers. Speculative orders 
given by merchants to manufacturers induce them to extend 
their operations, and to become applicants to bankers for 
increased advances, which, if made in notes, are not paid 



REGULATION OF CURRENCY. 221 

away to persons who return them into deposit, but are par- 
tially expended in paying wages, and pass into the various 
channels of retail trade, where they become directly effective 
in producing a further rise of prices. I cannot but think 
that this employment of bank notes must have been power- 
fully operative on prices at the time when notes of one and 
two pounds value were permitted by law. Admitting, how- 
ever, that the prohibition of notes below five pounds has now 
rendered this part of their operation comparatively insig- 
nificant by greatly limiting their applicability to the payment 
of wages, there is another form of their instrumentality 
which comes into play in the later stages of speculation, and 
which forms the principal argument of the more moderate 
supporters of the currency theory. Though advances by 
bankers are seldom demanded for the purpose of buying on 
speculation, they are largely demanded by unsuccessful specu- 
lators for the purpose of holding on ; and the competition of 
these speculators for a share of the loanable capital, makes 
even those who have not speculated, more dependent than 
before on bankers for the advances they require. Between 
the ascending period of speculation and the revulsion, there 
is an interval extending to weeks and sometimes months, of 
struggling against a fall. The tide having shown signs of 
turning, the speculative holders are unwilling to sell in a 
falling market, and in the meantime they require funds to 
enable them to fulfil even their ordinary engagements. It is 
this stage that is ordinarily marked by a considerable increase 
in the amount of the bank note circulation. That such an 
increase does usually take place, is denied by no one. And I 
think it must be admitted that this increase tends to prolong 
the duration of the speculations ; that it enables the specu- 
lative prices to be kept up for some time after they would 
otherwise have collapsed ; and therefore prolongs and in- 
creases the drain of the precious metals for exportation, which 
is a leading feature of this stage in the progress of a com- 
mercial crisis : the continuance of which drain at last endan- 
gering the power of the banks to fulfil their engagement of 



222 B00K IIL CHAPTER XXIV. §3. 

paying their notes on demand, they are compelled to contract 
their credit more suddenly and severely than would have 
been necessary if they had been prevented from propping up 
speculation by increased advances, after the time when the 
recoil had become inevitable. 

§ 3. To prevent this retardation of the recoil, and ulti- 
mate aggravation of its severity, is the object of the scheme 
for regulating the currency, of which Lord Overstone, Mr. 
ISorman and Colonel Torrens, were the first promulgators, 
and which has, in a slightly modified form, been enacted into 
law.* 

According to the scheme in its original purity, the issue of 
promissory notes for circulation was to be confined to one 
body. In the form adopted by Parliament, all existing 
issuers were permitted to retain this privilege, but none were 
to be thereafter admitted to it, even in the place of those who 
might discontinue their issues : and, for all except the Bank 
of England, a maximum of issues was prescribed, on a scale 

* I think myself justified in affirming that the mitigation of commercial re- 
vulsions is the real, and only serious, purpose of the Act of 1844. I am quite 
aware that its supporters insist (especially since 184*7) on its supreme efficacy in 
" maintaining the convertibility of the Bank note." But I must be excused for 
not attaching any serious importance to this one among its alleged merits. The 
convertibility of the Bank note was maintained, and would have continued to bo 
maintained, at whatever cost, under the old system. As was well said by Lord 
Overstone in his Evidence, the Bank can always, by a sufficiently violent action 
on credit, save itself at the expense of the mercantile public. That the Act of 
1844 mitigates the violence of that process, is a sufficient claim to prefer in its 
behalf. Besides, if we suppose such a degree of mismanagement on the part of 
the Bank, as, were it not for the Act, would endanger the continuance of con- 
vertibility, the same (or a less) degree of mismanagement, practised under the 
Act, would suffice to produce a suspension of payments by the Banking Depart- 
ment ; an event which the compulsory separation of the two departments brings 
much nearer to possibility than it was before, and which, involving as it would 
the probable stoppage of every private banking establishment in London, and 
perhaps also the non-payment of the dividends to the national creditor, would 
be a far greater immediate calamity than a brief interruption of the convertibility 
of the note ; insomuch that, to enable the Bank to resume payment of its de- 
posits, no Government would hesitate a moment to suspend payment of the 
notes, if suspension of the Act of 1844 proved insufficient. 



REGULATION OF CURRENCY. 223 

intentionally low. To the Bank of England no maximum 
was fixed for the aggregate amount of its notes, but only for 
the portion issued on securities, or in other words, on loan. 
These were never to exceed a certain limit, fixed in the first 
instance at fourteen millions.* All issues beyond that 
amount must be in exchange for bullion; of which the 
Bank is bound to purchase, at a trifle below the mint valu- 
ation, any quantity which is offered to it, giving its notes 
in exchange. In regard, therefore, to any issues of notes 
beyond the limit of fourteen millions, the Bank is purely 
passive, having no function but the compulsory one of 
giving its notes for gold at SI. 17s. 9d., and gold for its notes 
at SI. 17s. 10^d., whenever and by whomsoever it is called 
upon to do so. 

The object for which this mechanism is intended is, that 
the bank note currency may vary in its amount at the exact 
times, and in the exact degree, in which a purely metallic 
currency would vary. And the precious metals being the 
commodity that has hitherto approached nearest to that 
invariability in all the circumstances influencing value, which 
fits a commodity for being adopted as a medium of exchange, 
it seems to be thought that the excellence of the Act of 1844 
is fully made out, if under its operation the issues conform in 
all their variations of quantity, and therefore, as is inferred, of 
value, to the variations which would take place in a currency 
wholly metallic. 

Now, all reasonable opponents of the Act, in common 
with its supporters, acknowledge as an essential requisite of 
any substitute for the precious metals, that it should conform 
exactly in its permanent value to a metallic standard. And 
they say, that so long as it is convertible into specie on de- 

* A conditional increase of this maximum is permitted, but only when by 
arrangement with any country bank the issues of that bank are discontinued, 
and Bank of England notes substituted ; and even then the increase is limited to 
two-thirds of the amount of the country notes to be thereby superseded. Under 
this provision the amount of notes which the Bank of England is now at liberty 
to issue against securities, is rather under fourteen and a half millions. 



224 BOOK III. CHAPTER XXIV. §3. 

mand, it does and must so conform. But when the value 
of a metallic or of any other currency is spoken of, there 
are two points to be considered ; the permanent or average 
value, and the fluctuations. It is to the permanent value 
of a metallic currency, that the value of a paper currency 
ought to conform. But there is no obvious reason why it 
should be required to conform to the fluctuations too. The 
only object of its conforming at all, is steadiness of value; 
and with respect to fluctuations the sole thing desirable is 
that they should be the smallest possible. Now the fluctu- 
ations in the value of the currency are determined, not by its 
quantity, whether it consists of gold or of paper, but by the 
expansions and contractions of credit. To discover, there- 
fore, what currency will conform the most nearly to the 
permanent value of the precious metals, we must find under 
what currency the variations in credit are least frequent 
and least extreme. Now, whether this object is best at- 
tained by a metallic currency (and therefore by a paper 
currency exactly conforming in quantity to it) is precisely 
the question to be decided. If it should prove that a paper 
currency which follows all the fluctuations in quantity of a 
metallic, leads to more violent revulsions of credit than one 
which is not held to this rigid conformity, it will follow that 
the currency which agrees most exactly in quantity with a 
metallic currency is not that which adheres closest to its 
value ; that is to say, its permanent value, with which alone 
agreement is desirable. 

"Whether this is really the case or not we will now inquire. 
And first ; let us consider whether the Act effects the practical 
object chiefly relied on in its defence by the more sober of 
its advocates, that of arresting speculative extensions of credit 
at an earlier period, with a less drain of gold, and consequently 
by a milder and more gradual process. I think it must be 
admitted that to a certain degree it is successful in this 
object. 

I am aware of what may be urged, and reasonably urged, 
in opposition to this opinion. It maybe said, that when the 



REGULATIOxV OF CURRENCY. 225 

time arrives at which the banks are pressed for increased 
advances to enable speculators to fulfil their engagements, a 
limitation of the issue of notes will not prevent the banks, if 
otherwise willing, from making these advances ; that they 
have still their deposits as a source from which loans may be 
made beyond the point which is consistent with prudence as 
bankers ; and that even if they refused to do so, the only 
effect would be, that the deposits themselves would be drawn 
out to supply the wants of the depositors ; which would be 
just as much an addition to the bank notes and coin in the 
hands of the public, as if the notes themselves were increased. 
This is true, and is a sufficient answer to those who think 
that the advances of banks to prop up failing speculations 
are objectionable chiefly as an increase of the currency. But 
the mode in which they are really objectionable, is as an ex- 
tension of credit. If, instead of lending their notes, the banks 
allow the demand of their customers for disposable capital 
to act on the deposits, there is the same increase of currency, 
(for a short time at least,) but there is not an increase of 
loans. The rate of interest, therefore, is not prevented from 
rising at the first moment when the difficulties consequent 
on excess of speculation begin to be felt. On the contrary, 
the necessity which the banks feel of diminishing their ad- 
vances to maintain their solvency, when they find their de- 
posits flowing out, and cannot supply the vacant place by 
their own notes, accelerates the rise of the rate of interest. 
Speculative holders are therefore obliged to submit earlier 
to that loss by resale, which could not have been prevented 
from coming on them at last : the recoil of prices and col- 
lapse of general credit take place sooner. 

To appreciate the effect which this acceleration of the 
crisis has in mitigating its intensity, let us advert more 
particularly to the nature and effects of that leading feature 
in the period just preceding the collapse, the drain of gold. 
A rise of prices produced by a speculative extension of 
credit, even when bank notes have not been the instrument, 
is not the less effectual (if it lasts long enough) in turning 
54 



226 B00K m - CHAPTER XXIV. §3. 

the exchanges : and when the exchanges have turned from 
this cause, they can only be turned back, and the drain of 
gold stopped, either by a fall of prices or by a rise of the 
rate of interest. A fall of prices will stop it by removing 
the canse which produced it, and by rendering goods a 
more advantageous remittance than gold, even for paying 
debts already due. A rise of the rate of interest, and con- 
sequent fall of the prices of securities, will accomplish the 
purpose still more rapidly, by inducing foreigners, instead 
of taking away the gold which is due to them, to leave it 
for investment within the country, and even send gold into 
the country to take advantage of the increased rate of in- 
terest. Of this last mode of stopping a drain of gold, the 
year 1847 afforded signal examples. But until one of these 
two things takes place — until either prices fall, or the rate 
of interest rises — nothing can possibly arrest, or even mod- 
erate, the efflux of gold. Now, neither will prices fall nor 
interest rise, so long as the unduly expanded credit is 
upheld by the continued advances of bankers. It is well 
known that when a drain of gold has set in, even if bank 
notes have not increased in quantity, it is upon them that 
the contraction first falls, the gold wanted for exportation 
being always obtained from the Bank of England in ex- 
change for its notes. But under the system which preceded 
1844, the Bank of England, being subjected, in common 
with other banks, to the importunities for fresh advances 
which are characteristic of such a time, could, and often 
did, immediately re-issue the notes which had been returned 
to it in exchange for bullion. It is a great error, certainly, 
to suppose that the mischief of this re-issue chiefly consisted 
in preventing a contraction of the currency. It was, how- 
ever, quite as mischievous as, it has ever been supposed to 
be. As long as it lasted, the efflux of gold could not cease, 
since neither would prices fall nor interest rise while these 
advances continued. Prices having risen without any in- 
crease of bank notes, could well have fallen without a dimi- 
nution of them ; but having risen in consequence of an 



REGULATION OF CURRENCY. 227 

extension of credit, they could not fall without a contraction 
of it. As long, therefore, as the Bank of England and 
the other banks persevered in this course, so long gold con- 
tinued to flow out, until so little was left that the Bank of 
England, being in danger of suspension of payments, was 
compelled at last to contract its discounts so greatly and 
suddenly as to produce a much more extreme variation in 
the rate of interest, inflict much greater loss and distress 
on individuals, and destroy a much greater amount of the 
ordinary credit of the country, than any real necessity re- 
quired. 

I acknowledge, (and the experience of 1847 has proved 
to those who overlooked it before,) that the mischief now 
described, may be wrought, and in large measure, by the 
Bank of England, through its deposits alone. It may con- 
tinue or even increase its discounts and advances, when it 
ought to contract them ; with the ultimate effect of making 
the contraction much more severe and sudden than neces- 
sary. I cannot but think, however, that banks which com- 
mit this error with their deposits, would commit it still more 
if they were at liberty to make increased loans with their 
issues as well as their deposits. I am compelled to think 
that the being restricted from increasing their issues, is a 
real impediment to their making those advances which 
arrest the tide at its turn, and make it rush like a torrent 
afterwards. If the restrictions of the Act of 1844 were no 
obstacle to the advances of banks in the interval preceding 
the crisis, why were they found an insuperable obstacle 
during the crisis ? an obstacle which nothing less would 
overcome than a suspension of the law, through the assump- 
tion by Government of a temporary dictatorship ? Evi- 
dently they are an obstacle ; * and when the Act is blamed 

* It would not be to the purpose to say, by way of objection, that the ob- 
stacle may be evaded by granting the increased advance in book credits, to be 
drawn against by cheques, without the aid of bank notes. This is indeed possi- 
ble, as Mr. Fullarton has remarked, and as I have myself said in a former chap- 
ter. But this substitute for bank-note currency has never yet been organized ; 



228 B00K m - CHAPTER XXIV. § 

for interposing obstacles at a time when not obstacles but 
facilities are needed, it must in justice receive credit for 
interposing them when they are an acknowledged benefit. 
In this particular, therefore, I think it cannot be denied, 
that the new system is a real improvement upon the old. 

§ 4. But though I am compelled to differ thus far from 
the opinion of Mr. Tooke and of Mr. Fullarton, I concur 
with them in thinking that these advantages, whatever 
value may be put on them, are purchased by still greater 
disadvantages. 

In the first place, a large extension of credit by bankers, 
though most hurtful when, credit being already in an in- 
flated state, it can only serve to retard and aggravate the 
collapse, is most salutary when the collapse has come, and 
when credit instead of being in excess is in distressing de- 
ficiency, and increased advances by bankers, instead of 
being an addition to the ordinary amount of floating credit, 
serve to replace a mass of other credit which has been sud- 
denly destroyed. Antecedently to 1844, if the Bank of 
England occasionally aggravated the severity of a com- 
mercial revulsion by rendering the collapse of credit more 
tardy and thence more violent than necessary, it in return 
rendered invaluable services during the revulsion itself, by 
coming forward with advances to support solvent firms, at 
a time when all other paper and almost all mercantile credit 
had become comparatively valueless. This service was 
eminently conspicuous in the crisis of 1825-6, the severest 
probably ever experienced ; during which the Bank in- 
creased what is called its circulation by many millions, in 
advances to those mercantile firms of whose ultimate sol- 
vency it felt no doubt ; advances which if it had been 

and the law having clearly manifested its intention that, in the case supposed, in- 
creased credits should not be granted, it is a problem whether the law would not 
reach what might be regarded as an evasion of its prohibitions, or whether defer- 
ence to the law would not produce (as it has hitherto done) on the part of bank- 
ing establishments, conformity to its spirit and purpose, as well as to its mere 
letter. 



REGULATION OF CURRENCY. '229 

obliged to withhold, the severity of the crisis would have 
been still greater than it was. If the Bank, it is justly 
remarked by Mr. Fullarton,* complies with such applica- 
tions, " it must comply with them by an issue of notes, for 
notes constitute the only instrumentality through which the 
Bank is in the practice of lending its credit. But those 
notes are not intended to circulate, nor do they circulate. 
There is no more demand for circulation than there was 
before. On the contrary, the rapid decline of prices which 
the case in supposition presumes, would necessarily con- 
tract the demand for circulation. The notes would either 
be returned to the Bank of England, as fast as they were 
issued, in the shape of deposits, or would be locked up in 
the drawers of the private London bankers, or distributed 
by them to their correspondents in the country, or inter- 
cepted by other capitalists, who, during the fervour of the 
previous excitement, had contracted liabilities which the}' 
might be imperfectly prepared on the sudden to encounter. 
In such emergencies, every man connected with business, 
who has been trading on other means than his own, is 
placed on the defensive, and his whole object is to make 
himself as strong as possible, an object which cannot be 
more effectually answered than by keeping by him as large 
a reserve as possible in paper which the law has made a 
legal tender. The notes themselves never find their way 
into the produce market ; and if they at all contribute to 
retard " (or, as I should rather say, to moderate) " the fall 
of prices, it is not by promoting in the slightest degree the 
effective demand for commodities, not by enabling con- 
sumers to buy more largely for consumption, and so giving 
briskness to commerce, but by a process precisely the re- 
verse, by enabling the holders of commodities to hold on, 
by obstructing traffic and repressing consumption." 

The opportune relief thus afforded to credit, during the 
excessive contraction wmich succeeds to an undue expan- 
sion, is consistent with the principle of the new system ; 

* P. 106. 



230 B00K Ht CHAPTER XXIV. §4. 

for an extraordinary contraction of credit, and fall of 
prices, inevitably draw gold into the country, and the prin- 
ciple of the system is that the bank-note currency shall be 
permitted, and even compelled, to enlarge itself, in all 
cases in which a metallic currency would do the same. 
But, what the principle of the law would encourage, its 
provisions in this instance preclude, by not suffering the 
increased issues to take place until the gold has actually 
arrived ; which is never until the worst part of the crisis is 
past, and almost all the losses and failures attendant on it 
are consummated. The machinery of the system withholds, 
until for many purposes it comes too late, the very medi- 
cine which the theory of the system prescribes as the appro- 
priate remedy.* 

This function of banks in filling up the gap made in 
mercantile credit by the consequences of undue speculation 
and its revulsion, is so entirely indispensable, that if the 
Act of 18 M continues unrepealed, there can be no difficulty 
in foreseeing that its provisions must be suspended, as they 
were in 1847, in every period of great commercial difficulty, 
as soon as the crisis has really and completely set in.f 
Were this all, there would be no absolute inconsistency in 
maintaining the restriction as a means of preventing a 
crisis, and relaxing it for the purpose of relieving one. But 
there is another objection, of a still more radical and com- 
prehensive character, to the new system. 

Professing, in theory, to require that a paper currency 
shall vary in its amount in exact conformity to the varia- 

* True, the Bank is not precluded from making increased advances from its 
deposits, which are likely to be of unusually large amount, since, at these peri* 
ods, every one leaves his money in deposit in order to have it within call. But, 
that the deposits are not always sufficient, was conclusively proved in 184*7, 
when the Bank stretched to the very utmost the means of relieving commerce 
which its deposits afforded, without allaying the panic, which however ceased at 
once when the Government decided on suspending the Act. 

f This prediction was verified on the very next occurrence of a commercial 
crisis, in 1857 ; when Government were again under the necessity of suspending, 
on their own responsibility, the provisions of the Act. 



REGULATION OF CURRENCY. 231 

tions of a metallic currency, it provides, in fact, that in 
every case of an efflux of gold, a corresponding diminution 
shall take place in the quantity of bank notes ; in other 
words, that every exportation of the precious metals shall 
be virtually drawn from the circulation ; it being assumed 
that this would be the case if the currency were wholly 
metallic. This theory, and these practical arrangements, 
are adapted to the case in which the drain of gold originates 
in a rise of prices produced by an undue expansion of cur- 
rency or credit ; but they are adapted to no case beside. 

When the efflux of gold is the last stage of a series of 
effects arising from an increase of the currency, or from an 
expansion of credit tantamount in its effect on prices to an 
increase of currency, it is in that case a fair assumption that 
in a purely metallic system the gold exported would be 
drawn from the currency itself; because such a drain, being 
in its nature unlimited, will necessarily continue as long as 
currency and credit are undiminished. But an exportation 
of the precious metals often arises from no causes affecting 
currency or credit, but simply from an unusual extension 
of foreign payments, arising either from the state of the 
markets for commodities, or from some circumstance not 
commercial. In this class of causes, four, of powerful oper- 
ation, are included, of each of which the last fifty years of 
English history afford repeated instances. The first is that 
of an extraordinary foreign expenditure by government, 
either political or military ; as in the revolutionary war, 
and, as long as it lasted, during the late war with Russia. 
The second is the case of a large exportation of capital for 
foreign investment ; such as the loans and mining opera- 
tions which partly contributed to the crisis of 1825, and the 
American speculations which were the principal cause of 
the crisis of 1839. The third is a failure of crops in the 
countries which supply the raw material of important man- 
ufactures ; such as the cotton failure in America, which 
compelled England, in 1847, to incur unusual liabilities for 
the purchase of that commodity at an advanced price. The 



232 BOOK III. CHAPTER XXIV. §4. 

iburtli is a bad harvest, and a great consequent importation 
of food ; of which the years 1846 and 1847 present an ex- 
ample surpassing all antecedent experience. 

In none of these cases, if the currency were metallic, 
would the gold or silver exported for the purposes in ques- 
tion be necessarily, or even probably, drawn wholly from 
the circulation. It would be drawn from the hoards, which 
under a metallic currency always exist to a very large 
amount ; in uncivilized countries, in the hands of all who 
can afford it ; in civilized countries chiefly in the form of 
bankers' reserves. Mr. Tooke, in his " Inquiry into the 
Currency Principle," bears testimony to this fact ; but it is 
to Mr. Fullarton that the public are indebted for the clearest 
and most satisfactory elucidation of it. As I am not aware 
that this part of the theory of currency has been set forth 
by any other writer with anything like the same degree of 
completeness, I shall quote somewhat largely from this able 
production. 

" ~No person who has ever resided in an Asiatic country, 
where hoarding is carried on to a far larger extent in pro- 
portion to the existing stock of wealth, and where the prac- 
tice has become much more deeply engrafted in the habits 
of the people, by traditionary apprehensions of insecurity 
and the difficulty of finding safe and remunerative invest- 
ments, than in any European community — no person who 
has had personal experience of this state of society, can be at 
a loss to recollect innumerable instances of * large metallic 
treasures extracted in times of pecuniary difficult}'- from the 
coffers of individuals by the temptation of a high rate of 
interest, and brought in aid of the public necessities, nor, 
on the other hand, of the facilities with which those treas- 
ures have been absorbed again, when the inducements which 
had drawn them into light were no longer in operation. In 
countries more advanced in civilization and wealth than the 
Asiatic principalities, and where no man is in fear of at- 
tracting the cupidity of power by an external display of 
riches, but where the interchange of commodities is still 



REGULATION OF CURRENCY. 233 

almost universally conducted through the medium of a 
metallic circulation, as is the case with most of the com- 
mercial countries on the Continent of Europe, the motives 
for amassing the precious metals may be less powerful than 
in the majority of Asiatic principalities ; but the ability to 
accumulate being more widely extended, the absolute quan- 
tity amassed will be found probably to bear a considerably 
larger proportion to the population.* In those states which 
lie exposed to hostile invasion, or whose social condition is 
unsettled and menacing, the motive indeed must still be 
very strong ; and in a nation carrying on an extensive com- 
merce, both foreign and internal, without any considerable 
aid from any of the banking substitutes for money, the re- 
serves of gold and silver indispensably required to secure 
the regularity of payments, must of themselves engross a 
share of the circulating coin which it would not be easy to 
estimate. 

" In this country, where the banking system has been 
carried to an extent and perfection unknown in any 
other part of Europe, and may be said to have entirely 
superseded the use of coin, except for retail dealings and 
the purposes of foreign commerce, the incentives to private 
hoarding exist no longer, and the hoards have all been 
transferred to the banks, or rather, I should say, to the 
Bank of England. But in France, where the bank-note 
circulation is still comparatively limited, the quantity of 
gold and silver coin in existence I find now currently esti- 
mated, on what are described as the latest authorities, at 
the enormous sum of 120 millions sterling ; nor is the esti- 
mate at all at variance with the reasonable probabilities of 
the case. Of this vast treasure there is every reason to 
presume that a very large proportion, probably by much 

* It is known, from unquestionable facts, that the hoards of money at all 
times existing in the hands of the French peasantry, often from a remote date, 
surpass any amount which could have been imagined possible ; and even in so 
poor a country as Ireland, it has of late been ascertained, that the small farmers 
sometimes possess hoards quite disproportioned to their visible means of subsist- 
ence. 



234 BOOK III. CHAPTER XXIV. §4. 

the greater part, is absorbed in the hoards. If you present 
for payment a bill for a thousand francs to a French banker,, 
he brings you the silver in a sealed bag from his strong 
room. And not the banker only, but every merchant and 
trader, according to his means, is under the necessity of 
keeping by him a stock of cash sufficient not only for 
his ordinary disbursements, but to meet any unexpected 
demands. That the quantity of specie accumulated in 
these, innumerable depots, not in France only, but all over 
the Continent, where banking institutions are still either 
entirely wanting or very imperfectly organized, is not 
merely immense in itself, but admits of being largely drawn 
upon, and transferred even in vast masses from one country 
to another, with very little, if any, effect on prices, or other 
material derangements, we have had some remarkable 
proofs : " among others, " the signal success which attended 
the simultaneous efforts of some of the principal European 
powers (Eussia, Austria, Prussia, Sweden, and Denmark) 
to replenish their treasuries, and to replace with coin a 
considerable portion of the depreciated paper which the 
necessities of the war had -forced upon them, and this at 
the very time when the available stock of the precious 
metals over the world had been reduced by the exertions 
of England to recover her metallic currency. . . . There 
can be no doubt that these combined operations were on a 
scale of very extraordinary magnitude, that they were ac- 
complished without any sensible injury to commerce or 
public prosperity, or any other effect than some temporary 
derangement of the exchanges, and that the private hoards 
of treasure accumulated throughout Europe during the war 
must have been the principal source from which all this 
gold and silver was collected. And no person, I think, can 
fairly contemplate the vast superflux of metallic wealth thus 
proved to be at all times in existence, and, though in a 
dormant and inert state, always ready to spring into activity 
on the first indication of a sufficiently intense demand, with- 
out feeling themselves compelled to admit the possibility 



REGULATION OF CURRENCY. 235 

of the mines being even shut up for years together, and the 
production of the metals altogether suspended, while there 
might be scarcely a perceptible alteration in the exchange- 
able value of the metal." * 

Applying this to the currency doctrine and its advocates, 
" one might imagine," says Mr. Fullarton, f " that they 
supposed the gold which is drained off for exportation from 
a country using a currency exclusively metallic, to be col- 
lected by driblets at the fairs and markets, or from the tills 
of the grocers and mercers. They never even allude to the 
existence of such a thing as a great hoard of the metals, 
though upon the action of the hoards depends the whole 
economy of international payments between specie-circu- 
lating communities, while any operation of the money col- 
lected in hoards upon prices must, even according to the 
currency hypothesis, be wholly impossible. We know 
from experience what enormous payments in gold and 
silver specie-circulating countries are capable, at times, of 
making, without the least disturbance of their internal 
prosperity ; and whence is it supposed that these payments 
come, but from their hoards ? Let us think how the money 
market of a country transacting all its exchanges through 
the medium of the precious metals only, would be likely to 
be affected by the necessity of making a foreign payment 
of several millions. Of course the necessity could only be 
satisfied by a transmission of capital ; and would not the 
competition for the possession of capital for transmission 
which the occasion would call forth, necessarily raise the 
market rate of interest ? If the payment was to be made 
by the government, would not the government, in all prob- 
ability, have to open a new loan on terms more than usually 
favorable to the lender ? " If made by merchants, would 
it not be drawn either from the deposits in banks, or from 
the reserves which merchants keep by them in default of 



* Fullarton on the Regulation of Currencies, pp. 71- 
f Ibid. pp. 139—42. 



236 B00K m - CHAPTER XXIV. §4. 

banks, or would it not oblige them to obtain the necessary 
amount of specie by going into the money market as bor- 
rowers ? " And would not all this inevitably act upon the 
hoards, and draw forth into activity a portion of the gold 
and silver which the money-dealers had been accumulating, 
and some of them with the express view of watching such 
opportunities for turning their treasures to advantage ? . . . 
" To come to the present time [1844], the balance of 
payments with nearly all Europe has for about four years 
past been in favour of this country, and gold has been pour- 
ing in till the influx amounts to the unheard-of sum of 
about fourteen millions sterling. Yet in all this time has 
any one heard a complaint of any serious suffering inflicted 
on the people of the Continent ? Have prices there been 
greatly depressed beyond their range in this country ? 
Have wages fallen, or have merchants been extensively 
ruined by the universal depreciation of their stock ? There 
has occurred nothing of the kind. The tenor of commercial 
and monetary affairs has been everywhere even and tran- 
quil ; and in France more particularly, an improving rev- 
enue and extended commerce bear testimony to the con- 
tinued progress of internal prosperity. It may be doubted, 
indeed, if this great efflux of gold has withdrawn from that 
portion of the metallic wealth of the nation which really 
circulates, a single napoleon. And it has been equally 
obvious, from the undisturbed state of credit, that not only 
has the supply of specie indispensable for the conduct of 
business in the retail market been all the while uninterrupt- 
ed, but that the hoards have continued to furnish every 
facility requisite for the regularity of mercantile payments. 
It is of the very essence of the metallic system, that the 
hoards, in all cases of probable occurrence, should be equal 
to both objects ; that they should, in the first place, supply 
the bullion demanded for exportation, and in the next place> 
should keep up the home circulation to its legitimate com- 
plement. Every man trading under that system, who, in 
the course of his business, may have frequent occasion to 



REGULATION OF CURRENCY. 237 

remit large sums in specie to foreign countries, must either 
keep by him a sufficient treasure of his own or must have 
the means of borrowing enough from his neighbours, not 
only to make up when wanted the amount of his remit- 
tances, but to enable him, moreover, to carry on his ordi- 
nary transactions at home without interruption." 

In a country in which credit is carried to so great an 
extent as in England, one great reserve, in a single estab- 
lishment, the Bank of England, supplies the place, as far as 
the precious metals are concerned, of the multitudinous re- 
serves of other countries. The theoretical principle, there- 
fore, of the currency doctrine would require, that all those 
drains of the metal, which, if the currency were purely 
metallic, would be taken from the hoards, should be allowed 
to operate freely upon the reserve in the coffers of the Bank 
of England, without any attempt to stop it either by a 
diminution of the currency or by a contraction of credit. 
Nor to this would there be any well-grounded objection, 
unless the drain were so great as to threaten the exhaustion 
of the reserve, and a consequent stoppage of payments ; a 
danger against which it is possible to take adequate precau- 
tions, because in the cases which we are considering, the 
drain is for foreign payments of definite amount, and stops 
of itself as soon as these are effected. And in all systems it 
is admitted that the habitual reserve of the Bank should 
exceed the utmost amount to which experience warrants 
the belief that such a drain may extend ; which extreme 
limit Mr. Fullarton affirms to be seven millions, but Mr. 
Tooke recommends an average reserve of ten, and in his 
last publication, of twelve millions. 

The machinery, however, of the new system insists upon 
bringing about by force, what its principle not only does 
not require, but positively condemns. Every drain for ex- 
portation, whatever may be its cause, and whether under a 
metallic currency it would affect the circulation or not, is 
now compulsorily drawn from that source alone. The bank 
note circulation must be diminished by an amount equal to 



238 B00K m - CHAPTER XXTV. §4. 



that of the metal exported, though it be to the full extent 
of seven or twelve millions. And this, be it remembered, 
when there has been no speculative rise of prices which it 
is indispensable to correct, no unusual extension of credit 
requiring contraction ; but the demand for gold is solely 
occasioned by foreign payments on account of government, 
or large corn importations consequent on a bad harvest. 

I grant that when large foreign payments require to be 
made, the means wherewith to make them must in general 
be drawn from the loanable capital of the country ; the 
consequence of which is a rise of the rate of interest. In 
such circumstances some pressure on the money market is 
unavoidable : but that pressure is much increased in sever- 
ity by the operation of the Act of 1844. The case is gener- 
ally stated as if the Act only operated in one way, namely, 
by preventing the Bank, when it has parted with (say) three 
millions of bullion in exchange for three millions of its notes, 
from again lending those notes, in discounts or other ad- 
vances. But the Act really does much more than this. It 
is well known, that the first operation of a drain is always 
on the banking department. The bank deposits constitute 
the bulk of the unemployed and disposable capital of the 
country ; and capital wanted for foreign payments is almost 
always obtained mainly by drawing out deposits. Suppos- 
ing three millions to be the amount wanted, three millions 
of notes are drawn from the banking department (either di- 
rectly or through the private bankers, who keep the bulk 
of their reserves with the Bank of England), and the three 
millions of notes, thus obtained, are presented at the Issue 
Department, and exchanged against gold for exportation. 

Thus a drain upon the country at large of only three mil- 
lions, is a drain upon the Bank virtually of six millions. 
The deposits have lost three millions, and the reserve of 
the Issue Department has lost an equal amount. As the 
two departments, so long as the Act remains in operation, 
cannot even in the utmost extremity help one another, each 
must take its separate precautions for its own safety. What- 



.. 



REGULATION OF CURRENCY. 239 

ever measures, therefore, on the part of the Bank, would 
have been required under the old system by a drain of six 
millions, are now rendered necessary by a drain only of 
three. The Issue Department protects itself in the manner 
prescribed by the Act, by not re-issuing the three millions 
of notes which have been returned to it. But the Banking 
Department must take measures to replenish its reserve, 
which has been reduced by three millions. Its liabilities 
having also decreased three millions, by the loss of that 
amount of deposits, the reserve, on the ordinary banking 
principle of a third of the liabilities, will bear a reduction 
of one million. But the other two millions it must procure 
by letting that amount of advances run out, and refusing 
to renew them. Not only therefore must it raise its rate 
of interest, but it must effect, by whatever means, a dimi- 
nution of two millions in the total amount of its discounts, 
or it must sell securities to an equal amount. This violent 
action on the money market for the purpose of replenishing 
the Banking reserve, is wholly occasioned by the Act of 
1844. If the restrictions of that Act did not exist, the 
Bank, instead of contracting its discounts, would simply 
transfer two millions, either in gold or in notes, from the 
Issue to the Banking Department ; not in order to lend 
them to the public, but to secure the solvency of the Banking 
Department in the event of further unexpected demands by 
the depositors. And unless the drain continued, and reached 
so great an amount as to seem likely to exceed the whole 
of the gold in the reserves of both departments, the Bant 
would be under no necessity, while the pressure lasted, of 
withholding from commerce its accustomed amount of ac 
commodation, at a rate of interest corresponding to the in- 
creased demand.* 

* This, which I have called "the double action of drains," has been, strange- 
ly enough, understood as if I had asserted that the Bank is compelled to part 
with six millions worth of property by a drain of three millions. Such an asser- 
tion would be too absurd to require any refutation. Drains have a double 
action, not upon the pecuniary position of the Bank itself, but upon the measures 



240 BOOK III. CHAPTER XXIV. §4. 

I am aware it will be said that by allowing drains of 
this character to operate freely upon the Bank reserve until 
they cease of themselves, a contraction of the currency and 
of credit would not be prevented, but only postponed ; since 
if a limitatioD of issues were not resorted to for the purpose 
of checking the drain in its commencement, the same or a 
still greater limitation must take place afterwards, in order, 
by acting on prices, to bring back this large quantity of 
gold, for the indispensable purpose of replenishing the Bank 
reserve. But in this argument several things are over- 
looked. In the first place, the gold might be brought back, 
not by a fall of prices, but by the much more rapid and 
convenient medium of a rise of the rate of interest, involv- 
ing no fall of any prices except the prices of securities. 
Either English securities would be bought on account of 
foreigners, or foreign securities held in England would be 
sent abroad for sale, both which operations took place 
largely during the mercantile difficulties of 1847, and not 
only checked the efflux of gold, but turned the tide and 
brought the metal back. It was not, therefore, brought 
back by a contraction of the currency, though in this case 
it certainly was so by a contraction of loans. But even 

it is forced to take in order to stop the drain. Though the Bank itself is no 
poorer, its two reserves, the reserve in the banking department and the reserve 
in the issue department, have each been reduced three millions by a drain of 
only three. And as a separation of the departments renders it necessary that 
each of them separately should be kept as strong as the two together need be 
if they could help one another, the Bank's action on the money market must be 
as violent on a drain of three millions, as would have been required on the old 
system for one of six. The reserve in the banking department being less than 
it otherwise would be by the entire amount of the bullion in the issue depart- 
ment, and the whole amount of the drain falling in the first instance on that 
diminished reserve, the pressure of the whole drain on the half reserve is as 
much felt, and requires as strong measures to stop it, as a pressure of twice the 
amount on the entire reserve. As I have said elsewhere, f " it is as if a man 
having to lift a weight were restricted from using both hands to do it, and were 
only allowed to use one hand at a time ; in which case it would be necessary 
that each of his hands should be as strong: as the two together." 



t Evidence before the Committee of the House of Commons on the Bank Acts, in 1857. 



REGULATION OF CURRENCY. 241 

this is not always indispensable. For in the second place, 
it is not necessary that the gold should return with the same 
suddenness with which it went out. A great portion would 
probably return in the ordinary way of commerce, in pay- 
ment for exported commodities. The extra gains made by 
dealers and producers in foreign countries through the extra 
payments they receive from this country, are very likely to be 
partly expended in increased purchases of English commodi- 
ties, either for consumption or on speculation, though the 
effect may not manifest itself with sufficient rapidity to en- 
able the transmission of gold to be dispensed with in the 
first instance. These extra purchases would turn the bal- 
ance of payments in favour of the country, and gradually 
restore a portion of the exported gold ; and the remainder 
would probably be brought back, without any considerable 
rise of the rate of interest in England, by the fall of it in 
foreign countries, occasioned by the addition of some mil- 
lions of gold to the loanable capital of those countries. In- 
deed, in the state of things consequent on the gold discover- 
ies, when the enormous quantity of gold annually produced 
in Australia, and much of that from California, is distributed 
to other countries through England, and a month seldom 
passes without a large arrival, the Bank reserves can replen- 
ish themselves without any re-importation of the gold pre- 
viously carried off by a drain. All that is needful is an 
intermission, and a very brief intermission is sufficient, of 
the exportation. 

For these reasons it appears to me, that notwithstanding 
the beneficial operation of the Act of 1844 in the first stages 
of one kind of commercial crisis (that produced by over- 
speculation), it on the whole materially aggravates the 
seventy of commercial revulsions. And not only are con- 
tractions of credit made more severe by the Act, they are 
also made greatly more frequent. " Suppose," says Mr. 
George "Walker, in a clear, impartial, and conclusive series 
of papers in the Aberdeen Herald, forming one of the best 
existing discussions of the present question — " Suppose that, 
55 



242 BOOK III. CHAPTER XXIV. §5. 

of eighteen millions of gold, ten are in the issue department 
and eight are in the banking department. The result is the 
same as under a metallic currency with only eight millions 

in reserve instead of eighteen The effect of the Bank 

Act is, that the proceedings of the Bank under a drain are 
not determined by the amount of gold within its vaults, but 
are, or ought to be, determined by the portion of it belong- 
ing to the banking department. With the whole of the gold 
at its disposal, it may find it unnecessary to interfere with 
credit, or force down prices, if a drain leave a fair reserve 
behind. With only the banking reserve at its disposal, it 
must, from the narrow margin it has to operate on, meet 
all drains by counteractives more or less strong, to the in- 
jury of the commercial world ; and if it fail to do so, as it 
may fail, the consequence is destruction. Hence the extra- 
ordinary and frequent variations of the rate of interest under 
the Bank Act. Since 1847, when the eyes of the Bank were 
opened to its true position, it has felt it necessary, as a pre- 
cautionary measure, that every variation in the reserve 
should be accompanied by an alteration in the rate of in- 
terest." To make the Act innocuous, therefore, it would 
be necessary that the Bank, in addition to the whole of the 
gold in the Issue Department, should retain as great a re- 
serve in gold or notes in the Banking Department alone, as 
would suffice under the old system for the security both of 
the issues and of the deposits. 

§ 5. There remain two questions respecting a bank 
note currency, which have also been a subject of consider- 
able discussion of late years : whether the privilege of pro- 
viding it should be confined to a single establishment, such 
as the Bank of England, or a plurality of issuers should be 
allowed : and in the latter case, whether any peculiar pre- 
cautions are requisite or advisable, to protect the holders 
of notes against losses occasioned by the insolvency of the 
issuers. 

The course of the preceding speculations has led us to 



REGULATION OF CURRENCY. 243 

attach so much less of peculiar importance to bank notes, 
as compared with other forms of credit, than accords with 
the notions generally current, that questions respecting the 
regulation of so very small a part of the general mass of 
credit, cannot appear to us of such momentous import as 
they are sometimes considered. Bank notes, however, have 
so far a real peculiarity, that they are the only form of credit 
sufficiently convenient for all the purposes of circulation, to 
be able entirely to supersede the use of metallic money for 
internal purposes. Though the extension of the use of 
cheques has a tendency more and more to diminish the 
number of bank notes, as it would that of the sovereigns or 
other coins which would take their place if they were abol- 
ished ; there is sure, for a long time to come, to be a con- 
siderable supjuy of them, wherever the necessary degree of 
commercial confidence exists, and their free use is permitted. 
The exclusive privilege, therefore, of issuing them, if reserved 
to the government or to some one body, is a source of great 
pecuniary gain. That this gain should be obtained for the 
nation at large is both practicable and desirable : and if the 
management of a bank note currency ought to be so com- 
pletely mechanical, so entirely a thing of fixed rule, as it 
is made by the Act of 1844, there seems no reason why this 
mechanism should be worked for the profit of any private 
issuer, rather than for the public treasury. If, however, a 
plan be preferred which leaves the variations in the amount 
of issues in any degree whatever to the discretion of the 
issuers, it is not desirable that to the ever-growing attribu- 
tions of the government, so delicate a function should be 
superadded ; and that the attention of the heads of the 
state should be diverted from larger objects, by their being 
besieged with the applications, and made a mark for all the 
attacks, which are never spared to those deemed to be re- 
sponsible for any acts, however minute, connected with the 
regulation of the currency. It would be better that treasury 
notes, exchangeable for gold on demand, should be issued 
to a fixed amount, not exceeding the minimum of a bank 



244 B00K m - CHAPTER XXIV. §5. 

note currency, the remainder of the notes which may be 
required being left to be supplied either by one or by a 
number of private banking establishments. Or an estab- 
lishment like the Bank of England might supply the whole 
country, on condition of lending fifteen or twenty millions 
of its notes to the government without interest ; which 
would give the same pecuniary advantage to the state as 
if it issued that number of its own notes. 

The reason ordinarily alleged in condemnation of the 
system of plurality of issuers which existed in England be- 
fore the Act of 1844, and under certain limitations still sub- 
sists, is, that the competition of these different issuers in- 
duces them to increase the amount of their notes to an 
injurious extent. But we have seen that the power which 
bankers have of augmenting their issues, and the degree of 
mischief which they can produce by it, are quite trifling 
compared with the current over-estimate. As remarked 
by M. Eullarton,* the extraordinary increase of banking com- 
petition occasioned by the establishment of the joint-stock 
banks, a competition often of the most reckless kind, has 
proved utterly powerless to enlarge the aggregate mass of 
the bank note circulation ; that aggregate circulation hav- 
ing, on the contrary, actually decreased. In any case it 
appears desirable to maintain one great establishment 
like the Bank of England, distinguished from other banks 
of issue in this, that it alone is required to pay in gold, the 
others being at liberty to pay their notes with notes of the 
central establishment. The object of this is that there may 
be one body, responsible for maintaining a reserve of the 
precious metals sufficient to meet any drain that can reason- 
ably be expected to take place. By disseminating this re- 
sponsibility among a number of banks, it is prevented from 
operating efficaciously upon any : or if it be still enforced 
against one, the reserves of the metals retained by all the 
others are capital kept idle in pure waste, which may be 

* p. 89—92. 



REGULATION OF CURRENCY. 245 

dispensed with by allowing them at their option to pay in 
Bank of England notes. 

§ 6. The question remains whether, in case of a plural- 
ity of issuers, any peculiar precautions are needed to protect 
the holders of notes from the consequences of failure of pay- 
ment. Before 1826, the insolvency of banks of issue was 
a frequent and very serious evil, often spreading distress 
though a whole neighbourhood, and at one blow depriving 
provident industry of the results of long and painful saving. 
This was one of the chief reasons which induced Parliament, 
in that year, to prohibit the issue of bank notes, of a denomi- 
nation below five pounds, that the labouring classes at least 
might be as little as possible exposed to participate in this 
suffering. As an additional safeguard, it has been sug- 
gested to give the holders of notes a priority over other 
creditors, or to require bankers to deposit stock or other 
public securities as a pledge for the whole amount of their 
issues. The insecurity of the former bank note currency 
of England was partly the work of the law, which, in order 
to give a qualified monopoly of banking business to the 
Bank of England, had actually made the formation of safe 
banking establishments a punishable offence, by prohibit- 
ing the existence of any banks, in town or country, whether 
of issue or deposit, with a number of partners exceeding six. 
This truly characteristic specimen of the old system of 
monopoly and restriction, was done away with in 1826, 
both as to issues and deposits, everywhere but in a district 
of sixty-five miles radius round London, and in 1833 in that 
district also, as far as relates to deposits. It was hoped 
that the numerous joint-stock banks since established, would 
have furnished a more trustworthy currency, and that under 
their influence the banking system of England would have 
been almost as secure to the public as that of Scotland 
(where banking was always free) has been for two centuries 
past. But the almost incredible instances of reckless and 
fraudulent mismanagement which these institutions have 



246 



BOOK III. CHAPTER XXIV. §6. 



of late afforded (though in some of the most notorious cases 
the delinquent establishments have not been banks of issue), 
have shown only too clearly that, south of the Tweed at 
least, the joint-stock principle applied to banking is not the 
adequate safeguard it was so confidently supposed to be : 
and it is difficult now to resist the conviction, that if plural- 
ity of issuers is allowed to exist at all, some kind of special 
security in favour of the holders of notes should be exacted 
as an imperative condition. 



CHAPTER XXV. 

OF THE COMPETITION OF DIFFERENT COUNTRIES IN 
THE SAME MARKET. 

§ 1. In the phraseology of the Mercantile System, 
the language and doctrines of which are still the basis of 
what may be called the political economy of the selling 
classes, as distinguished from the buyers or consumers, 
there is no word of more frequent recurrence or more peril- 
ous import than the word underselling. To undersell other 
countries — not to be undersold by other countries — were 
spoken of, and are still very often spoken of, almost as if 
they were the sole purposes for which production and com- 
modities exist. The feelings of rival tradesmen, prevailing 
among nations, overruled for centuries all sense of the gen- 
eral community of advantage which commercial countries 
derive from the prosperity of one another : and that com- 
mercial spirit which is now one of the strongest obstacles to 
wars, was during a certain period of European history their 
principal cause. 

Even in the more enlightened view now attainable of the 
nature and consequences of international commerce, some, 
though a comparatively small, space must still be made for 
the fact of commercial rivality. Nations may, like individual 
dealers, be competitors, with opposite interests, in the mar- 
kets of some commodities, while in others they are in the 
more fortunate relation of reciprocal customers. The ben- 
efit of commerce does not consist, as it was once thought to 
do, in the commodities sold ; but, since the commodities 



248 B00K HI. CHAPTER XXV. §1. 

sold are the means of obtaining those which are bought, a 
nation would be cut off from the real advantage of com- 
merce, the imports, if it could not induce other nations to 
take any of its commodities in exchange ; and in proportion 
as the competition of other countries compels it to offer its 
commodities on cheaper terms, on pain of not selling them 
at all, the imports which it obtains by its foreign trade are 
procured at greater cost. 

These points have been adequately, though incidentally, 
illustrated in some of the preceding chapters. But the 
great space which the topic has filled, and continues to fill, 
in economical speculations, and in the practical anxieties 
both of politicians and of dealers and manufacturers, makes 
it desirable, before quitting the subject of international 
exchange, to subjoin a few observations on the things which 
do, and on those which do not, enable countries to undersell 
one another. 

One country can only undersell another in a given 
market, to the extent of entirely expelling her from it, on 
two conditions. In the first place, she must have a greater 
advantage than the second country in the production of the 
article exported by both ; meaning by a greater advantage 
(as has been already so fully explained) not absolutely, but 
in comparison with other commodities ; and in the second 
place, such must be her relation with the customer country 
in respect to the demand for each other's products, and such 
the consequent state of international values, as to give away 
to the customer country more than the whole advantage 
possessed by the rival country ; otherwise the rival will 
still be able to hold her ground in the market. 

Let us revert to the imaginary hypothesis of a trade be- 
tween England and Germany in cloth and linen : England 
being capable of producing 10 yards of cloth at the same 
cost with 15 yards of linen, Germany at the same cost with 
20, and the two commodities being exchanged between the 
two countries (cost of carriage apart) at some intermediate 
rate, say 10 for 17. Germany could not be permanently 



COMPETITION OF COUNTRIES IN THE SAME MARKET. 219 

undersold in the English market, and expelled from it, un- 
less by a country which offered not merely more than 17, 
but more than 20 yards of linen for ten of cloth. Short of 
that, the competition would only oblige Germany to pay 
dearer for cloth, but would not disable her from exporting 
linen. The country, therefore, which could undersell Ger- 
many, must, in the first place, be able to produce linen at 
less cost, compared with cloth, than Germany herself ; and 
in the next place, must have such a demand for cloth, or 
other English commodities, as would compel her, even when 
she became sole occupant of the market, to give a greater 
advantage to England than Germany could give by resign- 
ing the whole of hers ; to give, for example, 21 yards for 10. 
For if not — if, for example, the equation of international 
demand, after Germany was excluded, gave a ratio of 18 for 
10, Germany could again enter into the competition ; Ger- 
many would be now the underselling nation ; and there 
would be a point, perhaps 19 for 10, at which both countries 
would be able to maintain their ground, and to sell in Eng- 
land enough linen to pay for the cloth, or other English 
commodities, for which, on these newly adjusted terms of 
interchange, they had a demand. In like manner, England, 
as an exporter of cloth, could only be driven from the Ger- 
man market by some rival whose superior advantages in the 
production of cloth enabled her, and the intensity of whose 
demand for German produce compelled her, to offer 10 yards 
of cloth, not merely for less than 17 yards of linen, but for 
less than 15. In that case, England could no longer carry 
on the trade without loss ; but in any case short of this, she 
would merely be obliged to give to Germany more cloth for 
less linen than she had previously given. 

It thus appears that the alarm of being permanently un- 
dersold may be taken much too easily ; may be taken when 
the thing really to be anticipated is not the loss of the trade, 
but the minor inconvenience of carrying it on at a dimin- 
ished advantage ; an inconvenience chiefly falling on the 
consumers of foreign commodities, and not on the producers 



250 BOOK III. CHAPTER XXV. §2. 

or sellers of the exported article. It is no sufficient ground 
of apprehension to the English producers, to find that some 
other country can sell cloth in foreign markets at some 
particular time, a trifle cheaper than they can themselves 
afford to do in the existing state of prices in England. 
Suppose them to be temporarily unsold, and their exports 
diminished ; the imports will exceed the exports, there will 
be a new distribution of the precious metals, prices will fall, 
and as all the money expenses of the English producers will 
be diminished, they will be able (if the case falls short of 
that stated in the preceding paragraph) again to compete 
with their rivals. The loss which England will incur, will 
not fall upon the exporters, but upon those who consume 
imported commodities ; who, with money incomes reduced 
in amount, will have to pay the same or even an increased 
price for all things produced in foreign countries. 

§ 2. Such, I conceive, is the true theory, or rationale, 
of underselling. It will be observed that it takes no ac- 
count of some things which we hear spoken of, oftener per- 
haps than any others, in the character of causes exposing a 
country to be undersold. 

According to the preceding doctrine, a country cannot 
be undersold in any commodity, unless the rival country 
has a stronger inducement than itself for devoting its labour 
and capital to the production of the commodity ; arising 
from the fact that by doing so it occasions a greater saving 
of labour and capital, to be shared between itself and its cus- 
tomers — a greater increase of the aggregate produce of the 
world. The underselling, therefore, though a loss to the 
undersold country, is an advantage to the world at large ; 
the substituted commerce being one which economizes more 
of the labour and capital of mankind, and adds more to their 
collective wealth, than the commerce superseded by it. The 
advantage, of course, consists in being able to produce the 
commodity of better quality, or with less labour (compared 
with other things) ; or perhaps not with less labour, but in 



COMPETITION OF COUNTRIES IN THE SAME MARKET. 251 

less time ; with a less prolonged detention of the capital em- 
ployed. This may arise from greater natural advantages 
(such as soil, climate, richness of mines) ; superior capability, 
either natural or acquired, in the labourers ; better division of 
labour, and better tools, or machinery. But there is no place 
left in this theory for the case of lower wages. This, how- 
ever, in the theories commonly current, is a favourite cause 
of underselling. We continually hear of the disadvantage 
under which the British producer labours, both in foreign 
markets and even in his own, through the lower wages paid 
by his foreign rivals. These lower wages, we are told, ena- 
ble, or are always on the point of enabling them to sell at 
lower prices, and to dislodge the English manufacturer from 
all marke s in which he is not artificially protected. 

Before examining this opinion on grounds of principle, 
it is worth while to bestow a moment's consideration upon 
it as a question of fact. Is it true, that the wages of manu- 
facturing labour are lower in foreign countries than in Eng- 
land, in anv sense in which low wages are an advantage to 
the capitalist ? The artisan of Ghent or Lyons may earn 
less wages in a day, but does he not do less work ? Degrees 
of efficiency considered, does his labour cost less to his em- 
ployer ? Though wages may be lower on the Continent, is 
not the Cost of Labour, which is the real element in the 
competition, very nearly the same ? That it is so seems the 
opinion of competent judges, and is confirmed by the very 
little difference in the rate of profit between England and 
the Continental countries. But if so, the opinion is absurd 
that English producers can be undersold by their Conti- 
nental rivals from this cause. It is only in America that 
the supposition is prima facie admissible. In America, 
wages are much higher than in England, if we mean by 
wages the daily earnings of a labourer : but the productive 
power of American labour is so great — its efficiency, com- 
bined with the favourable circumstances in which it is 
exerted, makes it worth so much to the purchaser, that the 
Cost of Labour is lower in America than in England ; as is 



252 BOOK III. CHAPTER XXV. §3. 

proved by the fact that the general rate of profits and of 
interest is very much higher. 

§ 3. But is it true that low wages, even in the sense of 
low Cost of Labour, enable a country to sell cheaper in 
the foreign market ? I mean, of course, low wages whicli 
are common to the whole productive industry of the country. 

If wages, in any of the departments of industry which 
supply exports, are kept, artificially, or by some accidental 
cause, below the general rate of wages in the country, this 
is a real advantage in the foreign market. It lessens the 
comparative cost of production of those articles, in relation 
to others ; and has the same effect as if their production re- 
quired so much less labour. Take, for instance, the case of 
the United States in respect to certain commodities. In 
that country, tobacco and cotton, two great articles of ex- 
port, are produced by slave labour, while food and manu- 
factures generally are produced by free labourers, who 
either work on their own account or are paid by wages. In 
spite of the inferior efficiency of slave labour, there can be 
no reasonable doubt that in a country where the wages of 
free labour are so high, the work executed by slaves is a 
better bargain to the capitalist. To whatever extent it is 
so, this smaller cost of labour, being not general, but limited 
to those employments, is just as much a cause of cheapness 
in the products, both in the home and in the foreign mar- 
ket, as if they had been made by a less quantity of labour. 
If the slaves in the Southern States were emancipated, and 
their wages rose to the general level of the earnings of free 
labour in America, that country might be obliged to erase 
some of the slave-grown articles from the catalogue of its 
exports, and would certainly be unable to sell any of them 
in the foreign market at the present price. Their cheapness 
is partly an artificial cheapness, which may be compared U 
that produced by a bounty on production or on exportation : 
or, considering the means by which it is obtained, an apter 
comparison would be with the cheapness of stolen goods. 



COMPETITION OF COUNTRIES IN THE SAME MARKET. 253 

An advantage of a similar economical, though of a very 
different moral character, is that possessed by domestic 
manufactures ; fabrics produced in the leisure hours of fam- 
ilies partially occupied in other pursuits, who, not depending 
for subsistence on the produce of the manufacture, can afford 
to sell it at any price, however low, for which they think it 
worth while to take the trouble of producing. In an ac- 
count of the Canton of Zurich, to which I have had occasion 
to refer on another subject, it is observed,* " The workman 
of Zurich is to-day a manufacturer, to-morrow again an agri- 
culturist, and changes his occupations with the seasons, in a 
continual round. Manufacturing industry and tillage ad- 
vance hand in hand, in inseparable alliance, and in this 
union of the two occupations the secret may be found, why 
the simple and unlearned Swiss manufacturer can always go 
on competing, and increasing in prosperity, in the face of 
those extensive establishments fitted out with great eco- 
nomic, and (what is still more important) intellectual, re- 
sources. Even in those parts of the Canton where manu- 
factures have extended themselves the most widely, only 
one-seventh of all the families belong to manufactures 
alone ; four-sevenths combine that employment with agri- 
culture. The advantage of this domestic or family manu- 
facture consists chiefly in the fact, that it is compatible with 
all other avocations, or rather that it may in part be re- 
garded as only a supplementary employment. In winter, 
in the dwellings of the operatives, the whole family employ 
themselves in it : but as soon as spring appears, those on 
whom the early field labours devolve, abandon the in-door 
work ; many a shuttle stands still ; by degrees, as the field- 
work increases, one member of the family follows another, 
till at last, at the harvest, and during the so-called ' great 
works,' all hands seize the implements of husbandry ; but 
in unfavourable weather, and in all otherwise vacant hours, 
the work in the cottage is resumed, and when the ungenial 

* Historiseh-geographisch-statistisches Gemalde der Schweiz. Erstea Heft, 
1834, p. 105. 



254 B00K IIL CHAPTER XXV. §4. 

season again recurs, the people return in the same gradual 
order to their home occupation, until they have all re- 
sumed it." 

In the case of these domestic manufactures, the compara- 
tive cost of production, on which the interchange between 
countries depends, is much lower than in proportion to the 
quantity of labour employed. The workpeople, looking to 
the earnings of their loom for a part only, if for any part, 
of their actual maintenance, can afford to work for a less 
remuneration than the lowest rate of wages which can per- 
manently exist in the employments by which the labourer 
has to support the whole expense of a family. Working, as 
they do, not for an employer but for themselves, they may 
be said to carry on the manufacture at no cost at all, except 
the small expense of a loom and of the material ; and the 
limit of possible cheapness is not the necessity of living by 
their trade, but that of earning enough by the work to make 
that social employment of their leisure hours not dis- 
agreeable. 

§ 4. These two cases, of slave labour and of domestic 
manufactures, exemplify the conditions under which low 
wages enable a country to sell its commodities cheaper in 
foreign markets, and consequently to undersell its rivals, or 
to avoid being undersold by them. But no such advantage 
is conferred by low wages when common to all branches of 
industry. General low wages never caused any country to 
undersell its rivals, nor did general high wages ever hinder 
it from doing so. 

To demonstrate this, we must return to an elementary 
principle which was discussed in a former chapter.* Gen 
eral low wages do not cause low prices, nor high wages high 
prices, within the country itself. General prices are not 
raised by a rise of wages, any more than they would be 
raised by an increase of the quantity of labour required in 
all production. Expenses which affect all commodities 

* Supra, book iii. ch. iv. 



COMPETITION OF COUNTRIES IN THE SAME MARKET. 255 

equally, have no influence on prices. If the maker of 
broadcloth or cutlery, and nobody else, had to pay higher 
wages, the price of his commodity would rise, just as it 
would if he had to employ more labour ; because otherwise 
he would gain less profit than other producers, and nobody 
would engage in the employment. But if everybody has to 
pay higher wages, or everybody to employ more labour, 
the loss must be submitted to ; as it affects everybody alike, 
no one can hope to get rid of it by a change of employment, 
each therefore resigns himself to a diminution of profits, and 
prices remain as they were. In like manner, general low 
wages, or a general increase in the productiveness of labour, 
does not make prices low, but profits high. If wages fall, 
(meaning here by wages the cost of labour,) why, on that 
account, should the producer lower his price ? He will be 
forced, it may be said, by the competition of other capital- 
ists who will crowd into his employment. But other cap- 
italists are also paying lower wages, and by entering into 
competition with him they would gain nothing but what 
they are gaining already. The rate then at which labour is 
paid, as well as the quantity of it which is employed, affects 
neither the value nor the price of the commodity produced, 
except in so far as it is peculiar to that commodity, and not 
common to commodities generally. 

Since low wages are not a cause of low prices in the 
country itself, so neither do they cause it to offer its com- 
modities in foreign markets at a lower price. It is quite 
true that if the cost of labour is lower in America than :a 
England, America could sell her cottons to Cuba at a lower 
price than England, and still gain as high a profit as the 
English manufacturer. But it is not with the profit of the 
English manufacturer that the American cotton spinner will 
make his comparison ; it is with the profits of other Amer- 
ican capitalists. These enjoy, in common with himself, the 
benefit of a low cost of labour, and have accordingly a high 
rate of profit. This high profit the cotton spinner must also 
have : he will not content himself with the English profit. 



256 B00K HI. CHAPTER XXV. §5. 

It is true he may go on for a time at that lower rate, rather 
than change his employment ; and a trade may be carried 
on, sometimes for a long period, at a much lower profit 
than that for which it would have been originally engaged 
in. Countries which have a low cost of labour, and high 
profits, do not for that reason undersell others, but they do 
oppose a more obstinate resistance to being undersold, 
because the producers can often submit to a diminution of 
profit without being unable to live, and even to thrive, by 
their business. But this is all which their advantage does 
for them : and in this resistance they will not long per- 
severe, when a change of times which may give them equal 
profits with the rest of their countrymen has become mani- 
festly hopeless. 

§ 5. There is a class of trading and exporting commu- 
nities, on which a few words of explanation seem to be 
required. These are hardly to be looked upon as countries, 
carrying on an exchange of commodities with other countries, 
but more properly as outlying agricultural or manufacturing 
establishments belonging to a larger community. Our West 
India colonies, for example, cannot be regarded as coun- 
tries, with a productive capital of their own. If Manches- 
ter, instead of being where it is, were on a rock in the North 
Sea (its present industry nevertheless continuing), it would 
still be but a town of England, not a country trading with 
England; it would be merely, as now, a place where 
England finds it convenient to carry on her cotton manu- 
facture. The West Indies, in like manner, are the place 
where England finds it convenient to carry on the produc- 
tion of sugar, coffee, and a few o ( ther tropical commodities. 
All the capital employed is English capital ; almost all the 
industry is carried on for English uses ; there is little pro- 
duction of anything except the staple commodities, and 
these are sent to England, not to be exchanged for things 
exported to the colony and consumed by its inhabitants, but 
to be sold in England for the benefit of the proprietors 



COMPETITION OF COUNTRIES IN THE SAME MARKET. 257 

there. The trade with the West Indies is therefore hardly 
to be considered as external trade, but more resembles the 
traffic between town and country, and is amenable to the 
principles of the home trade. The rate of profit in the 
colonies will be regulated by English profits : the ex- 
pectation of profit must be about the same as in England, 
with the addition of compensation for the disadvantages 
attending the more distant and hazardous employment : 
and after allowance is made for those disadvantages, the 
value and price of West India produce in the English 
market must be regulated, (or rather must have been regu- 
lated formerly,) like that of any English commodity, by the 
cost of production. For the last ten or twelve years this 
principle has been in abeyance : the price was first kept up 
beyond the ratio of the cost of production by deficient sup- 
plies, which could not, owing to the deficiency of labour, be 
increased ; and more recently the admission of foreign com- 
petition has introduced another element, and some of the 
West India Islands are undersold, not so much because 
wages are higher than in Cuba and Brazil, as because they 
are higher than in England : for were they not so, Jamaica 
could sell her sugars at Cuban prices, and still obtain, though 
not a Cuban, an English rate of profit. 

It is worth while also to notice another class of small, 
but in this case mostly independent communities, which 
have supported and enriched themselves almost without any 
productions of their own, (except ships and marine equip- 
ments,) by a mere carrying trade, and commerce of entre- 
pot ' by buying the produce of one country, to sell it at a 
profit in another. Such were Venice and the Hanse Towns. 
The case of these communities is very simple. They made 
themselves and their capital the instruments, not of pro- 
duction, but of accomplishing exchanges between the pro- 
ductions of other countries. These exchanges are attended 
with an advantage to those countries — an increase of the 
aggregate returns to industry — part of which went to 
indemnify the agents, for the necessary expenses of trans- 



258 BOOK m. CHAPTER XXV. §5. 

port, and another part to remunerate the use of their capital 
and mercantile skill. The countries themselves had not 
capital disposable for the operation. When the Yenetians 
became the agents of the general commerce of Southern 
Europe, they had scarcely any competitors : the thing 
would not have been done at all without them, and there 
was really no limit to their profits except the limit to whft 
the ignorant feudal nobility could and would give for the 
unknown luxuries then first presented to their sight. At 
a later period competition arose, and the profit of this 
operation, like that of others, became amenable to natural 
laws. The carrying trade was taken up by Holland, a 
country with productions of its own and a large accumu- 
lated capital. The other nations of Europe also had now 
capital to spare, and were capable of conducting their 
foreign trade for themselves : but Holland, having, from 
the variety of circumstances, a lower rate of profit at home, 
could afford to carry for other countries at a smaller ad- 
vance on the original cost of the goods, than would have 
been required by their own capitalists ; and Holland, there- 
fore, engrossed the greatest part of the carrying trade of 
all those countries which did not keep it to themselves by 
Navigation Laws, constructed, like those of England, for 
the express purpose. 



CHAPTEK XXVI. 

OF DISTRIBUTION, AS AFFECTED BY EXCHANGE. 

§ 1. "We have now completed, as far as is compatible 
with our purposes and limits, the exposition of the ma- 
chinery through which the produce of a country is appor- 
tioned among the different classes of its inhabitants ; which 
is no other than the machinery of Exchange, and has for , 
the exponents of its operation, the laws of Value and of j 
Price. We shall now avail ourselves of the light thus 
acquired, to cast a retrospective glance at the subject of 
Distribution. The division of the produce among the three 
classes, Labourers, Capitalists, and Landlords, when consider- 
ed without any reference to Exchange, appeared to depend 
on certain general laws. It is fit that we should now con- 
sider whether these same laws still operate, when the 
distribution takes place through the complex mechanism 
of exchange and money ; or whether the properties of 
the mechanism interfere with and modify the presiding 
principles. 

The primary division of the produce of human exertion 
and frugality is, as we have seen, into three shares, wages, 
profits, and rent ; and these shares are portioned out to the 
persons entitled to them, in the form of money, and by a 
process of exchange ; or rather, the capitalist, with whom in 
the usual arrangements of society the produce remains, ; 
pays in money, to the other two sharers, the market value 
of their labour and land. If we examine, on what the 



260 B00K nt CHAPTER XXVI. §1. 

Ijecuniary value of labour, and the pecuniary value of the 
use of land, depend, we shall find that it is on the very same 
causes by which we found that wages and rent would be 
regulated if there were no money and no exchange of 
commodities. 

It is evident, in the first place, that the law of Wages is 
not affected by the existence or non-existence of Exchange / 
or Money. Wages depend on the ratio between population^ 
and capital ; and would do so if all the capital in the world \ 
were the property of one association, or if the capitalists 
among whom it is shared maintained each an establishment 
for the production of every article consumed in the com- 
munity, exchange of commodities having no existence. As 
the ratio between capital and population, everywhere but in 
new colonies, depends on the strength of the checks by which 
the too rapid increase of population is restrained, it may be 
said, popularly speaking, that wages depend on the checks 
to population ; that when the check is not death, by 
starvation or disease, wages depend on the prudence of the 
labouring people ; and that wages in any country are habit- 
ually at the lowest rate, to which in that country the 
labourer will suffer them to be depressed rather than put a 
restraint upon multiplication. 

What is here meant, however, by wages, is the labourer's 
real scale of comfort ; the quantity he obtains of the things 
which nature or habit has made necessary or agreeable to 
him : wages in the sense in which they are of importance to 
the receiver. In the sense in which they are of importance 
to the payer, they do not depend exclusively on such simple 
principles. Wages in the first sense, the wages on which 
the labourer's comfort depends, we will call real wages, or 
wages in kind. Wages in the second sense, we may be 
permitted to call, for the present, money wages ; assuming, 
as it is allowable to do, that money remains for the time an 
invariable standard, no alteration taking place in the con- 
ditions under which the circulating medium itself is produced 
or obtained. If money itself undergoes no variation in cost, 



DISTRIBUTION AS AFFECTED BY EXCHANGE. 261 

the money price of labour is an exact measure of the Cost of 
Labour, and may be made use of as a convenient symbol to 
express it. 

The money wages of labour are a compound result of two 
elements : first, real wages, or wages in kind, or in other 
words, the quantity which the labourer obtains of the ordi- 
nary articles of consumption ; and secondly, the money prices 
of those articles. In all old countries — all countries in which 
the increase of population is in any degree checked by the 
difficulty of obtaining subsistence — the habitual money price 
of labour is that which will just enable the labourers, one 
with another, to purchase the commodities without which 
they either cannot or will not keep up the population at 
its customary rate of increase. Their standard of comfort 
being given, (and by the standard of comfort in a labouring 
class, is meant that, rather than forego which, they will 
abstain from multiplication,) money wages depend on the 
money price, andj^j^fijora^o^j the cost of production^, of ~a£~ 
the various articles which the labourers haTut'uallv consume : 
ij because if their wages cannot procure them a given quan- 
(Pi tity of these, their increase will slacken, and their wages 
|| rise. Of these articles, food and other agricultural produce 
are so much the principal, as to leave little influence to 
anything else. 

It is at this point that we are enabled to invoke the aid 
of the principles which have been laid down in this Third 
Part. The cost of production of food and agricultural prod- . , . / .' iA v4/ 
uce has been analyzed in a preceding chapter. It depends 
on the produ ctive ness of the least fertile land , or ofj the least 
productively em plo yed port ion of capital, which the neces- 
sities of society have as yet put in requisition for agricultural 
purposes. The cost of production of the food grown in \ * ^ 
these least advantageous circumstances, determines, as we ' 
have seen, the exchange value and money price of the whole. 
In any given state, therefore, of the labourers' habits, their 
money wages depend on the productiveness of the least fertile 
land, or least productive agricultural capital : on the point 



262 B00K m - CHAPTER XXVI. §2. 

which cultivation has reached in its downward progress — in 
its encroachments on the barren lands, and its gradually 
increased strain upon the powers of the more fertile. Now, 
the force which urges cultivation in this downward course, 
is the increase of people; while the counter-force which 
checks the descent, is the improvement of agricultural science 

!and practice, enabling the same soil to yield to the same 
lal5olrF"1[ nore ample returns . The costliness of the most 
costly part of the produce of cultivation, is an exact expres- 
sion of the state, at any given moment, of the race which 
population and agricultural skill are always running against 
each other. 

§ 2. It is well said by Dr. Chalmers, that many of the 
most important lessons in political economy are to be learnt 
at the extreme margin of cultivation, the last point which 
the culture of the soil has reached in its contest with the 
spontaneous agencies of nature. The degree of productive- 
ness of this extreme margin, is an index to the existing state 
of the distribution of the produce among the three classes, 
of labourers, capitalists, and landlords. 
— )C When the demand of an increasing population for more 
food cannot be satisfied without extending cultivation to less 
fertile land, or incurring additional outlay, with a less pro- 
portional return, on land already in cultivation, it is a neces- 
sary condition of this increase of agricultural produce, that 
the value and price of that produce must first rise. But as 
soon as the price has risen sufficiently to give to the addi- 
tional outlay of capital the ordinary profit, the rise will not 
go on still further for the purpose of enabling the new land, 
<\ or the new expenditure on old land, to yield rent as well as 
\<^profit. The land or capital last put in requisition, and occu- 
lt pying what Dr. Chalmers calls the margin of cultivation, 
<JV will yield, and continue to yield, no rent. But Jf JhjsjdeMs 
)fiv\ no rent, the rent afforded by all other land or agricultural 
v * capital will be exactly so much as it produces more than this. 
»• ' ' The price of food will always on the average be such, that 



DISTRIBUTION AS AFFECTED BY EXCHANGE. 263 

the worst land, and the least productive instalment of the 
capital employed on the better lands, shall just replace the 
expenses with the ordinary profit. If the least favoured 
land and capital just do thus much, all other land and capital 
will yield an extra profit, equal to the proceeds of the extra 
produce due to their superior productiveness ; and this extra 
profit becomes, by competition, the prize of the landlords. 
Exchange, and money, therefore, make no difference in the 
law of rent : it is the same as we originally found it. Rent 
is the extra return made to agricultural capital when em- 
ployed with peculiar advantages ; the exact equivalent of 
what those advantages enable the producers to economize 
in the cost of production : thf^valnp anrl prinp _Qf the prod uce l 
bemg regulated by the cost of production to those producers 
who have no advantages; by the return to that portion of 
agricultural capital, the circumstances of which are the least 
favourable. 

§ 3. Wages and rent being thus regulated by the same'RviA ^£ 
principles when paid in money, as they would be if appor- • A*< 
tioned in kind, it follows that Profits are so likewise. For V 
the surplus, after replacing wages and paying rent, co nsti- lKs^ V\ 
£utes_Profits. 

We found in the last chapter of the Second Book, that 




the advances of the capitalist, when analyzed to their \~zZr 
ultimate elements, consist either in the purchase or main- YjOJ^"^» 
tenance of labour, or in the profits of former capitalists ; ancT *, iX"* 
that therefore profits in the last resort, depend upon the " y,\ 
Jir\Cost of Labour, fajQing^ as that r jaes^.and rising^ as it fall s. V^ 
^yLet us endeavour to trace more minutely the operation of d-**** 1 



this law 



A. . There are two modes in which the Cost of Labour, which */ 
is correctly represented (money being supposed invariable) 
by the money wages of the labourer, may be increased. 
The labourer may obtain greater comforts ; wages in kind — 
real wages — may rise. Or the progress of population may 
force down cultivation to inferior soils, and more costly 

> ap ~"iV»*J ».rlli .A^MJ 'tW'' SA*>i*± t^ijf. A C »cJLi £A V\Ju*WV \°^ 



264 BOOK III. CHAPTER XXVI. §3. 

processes ; thus raisiug the cost of production, the value, 
and the price, of the chief articles of the labourer's con- 
sumption. On either of these suppositions, the rate of profit 

will fall. 

If the labourer obtains more abundant commodities, 
only by reason of their greater cheapness ; if he obtains a 
greater quantity, but not on the whole a greater cost ; real . 
wages will be increased, but not money wages, and there 
will be nothing to affect the rate of profit. But jf he ob- 
tains a greater quantity of commodities of which the cost of 
production is not lowered, he obtains a greater cost; his 
money wages are higher. The expense of these increased 
money wages falls wholly on the capitalist. There are no 
conceivable means by which he can shake it off. It may 
>t be said — it used formerly to be said — that he will get rid of 
\ it by raising his price. But this opinion we have already, I 
\and more than once, fully refuted.* (vvjtrf'v/t^/ 

v The doctrine, indeed, that a rise of wa"ges/causes an 
-/* equivalent rise of prices, is, as we formerly observed, self- 
contradictory : for if it did so, it would not be a rise of 
wages ; the labourer would get no more of any commodity 
than he had before, let his money wages rise ever so much ; 
a rise of real wages would be an impossibility. This being 
r W^ / equally contrary to reason and to fact, it is evident that a 
7 rise of money wages does not raise prices ; that high wages 
? are not a cause of high prices. A rise of general wages falls 
'. on profits. There is no possible alternative. 

Having disposed of the case in which the increase of 
money wages, and of the Cost of Labour, arises from the 
labourer's obtaining more ample wages in kind, let us now 
suppose it'to arise from the increased cost of production of 
the things which he consumes; owing to an increase of 
population, unaccompanied by an equivalent increase of 
. agricultural skill. The augmented supply required by the 
population would not be obtained, unless the price of food 
rose sufficiently to remunerate the fa rmer for the increased 

* Supra, book iii. chap. iv. § 2, and chap. ixt. § 4. 



DISTRIBUTION AS AFFECTED BY EXCHANGE. 265 

cost of production. The farmer, however, in this case 
sustains a twofold disadvantage. He has to carry on his 
cultivation under less favourable conditions of productive- v 
ness than before. For this, as it is a disadvantage belong- 
ing to him only as a farmer, and not shared by other em- 
ployers, he will, on the general principles of value, be com- 
pensated by a rise of the price of his. commodity : indeed, 
until this rise has taken place, he will not bring to market 
the required increase of produce. But this very rise of 
price involves him in another necessity, for which he is not t 
compensated. He must pay higher money wages to his la- 
bourers. This necessity, being common to him with all 
other capitalists, forms no ground for a rise of price. The s 
price will rise, until it has placed him in as good a situation^ 
in respect of profits, as other employers of labour : it will < 
rise so as to indemnify him for the increased labour which 
he must now employ in order to produce a given quantity 
of food : but the increased wages of that labour are a bur- 
then common to all, and for which no one can be indem-< 
nifi ed . It w ill be paid wholly from profits . 

Thus we see that increased wages, when common to all 
descriptions of productive labourers, and when really repre- 
senting a greater Cost of Labour, are always and necessarily 
at the expense of profits. And by reversing the cases, we 
should find in like manner that diminished wages, when 
representing a really diminished Cost of Labour, are equiva- 
lent to a rise of profits. But the opposition of pecuniary 
interest thus indicated between the class of capitalists and 
that of labourers, is to a great extent only apparent. Real 
wages are a very different thing from the Cost of Labour, 
and are generally highest at the times and places where, 
from the easy terms on which the land yields all the produce 
as yet required from it, the value and price of food being 
low ~the cost o f labour to the employer, notwit hstanding its 
ample remuneration, is comparatively cheap, and the rate of 
profit consequently high ; as at present in the United States. 
We thus obtain a full confirmation of our original theorem 



266 BOOK III. CHAPTER XXVI. §3. 

that Profits depend on the Cost of Labour : or, to express 
the meaning with still greater accuracy, the rate of profit 
and the cost of labour vary inversely as one another, and 
1 are joint effects of the same agencies or causes. 

But does not this proposition require to be slightly modi- 
fied, by making allowance for that portion (though com- 
paratively small) of the expenses of the capitalist, which 
does not consist in wages paid by himself or reimbursed to 
previous capitalists, but in the profits of those previous 
capitalists? Suppose, for example, an invention in the 
manufacture of leather, the advantage of which should 
consist in rendering it unnecessary that the hides should 
remain for so great a length of time in the tan-pit. Shoe- 
makers, saddlers, and other workers in leather, would save 
a part of that portion of the cost of their material which 
consists of the tanner's profits during the time his capital is 
locked up ; and this saving, it may be said, is a source from 
which they might derive an increase of profit, though 
wages and the Cost of Labour remained exactly the same. 
In" the case here supposed, however, the consumer alone 
would benefit, since the prices of shoes, harness, and all 
other articles into which leather enters, would fall, until the 
profits of the producers were reduced to the general level. 
To obviate this objection, let us suppose that a "similar 
\ saving of expenses takes place in all departments of produc- 
tion at once. In that case, since values and prices would 
not be affected, profits would probably be raised ; but if we 
look more closely into the case we shall find, that it is 
because the cost of labour would be lowered. In this as in 
any other case of increase in the general productiveness of 
labour, if the labourer obtained only the same real wages, 
profits would be raised : but the same real wages would 
imply a smaller Cost of Labour ; the cost of production of 
all things having been, by the supposition, diminished. If, 
on the other hand, the real wages of labour rose proportion- 
ally, and the Cost of Labour to the employer remained the 
same, the advances of the capitalist would bear the same 



DISTRIBUTION AS AFFECTED BY EXCHANGE. 267 

ratio to his returns as before, and the rate of profit would 
be unaltered. The reader who may wish for a more minute 
examination of this point, will find it in the volume of 
separate Essays to which reference has before been made.* 
The question is too intricate in comparison with its impor- 
tance, to be further entered into in a work like the present ; 
and I will merely say, that it seems to result from the con- 
siderations adduced in the Essay, that there is nothing in the 
case in question to affect the integrity of the theory which 
affirms an exact correspondence, in an inverse direction, 
between the rate of profit and the Cost of Labour. 

* Essay IV. on Profits and Interest. 



BOOK IV. 



INFLUENCE OF THE PROGRESS OF SOCIETY 
ON PRODUCTION AND DISTRIBUTION. 



BOOK IV. 

INFLUENCE OP THE PROGRESS OF SOCIETY 
ON PRODUCTION AND DISTRIBUTION. 



CHAPTER I. 

GENERAL CHARACTERISTICS OF A PROGRESSIVE STATE 
OF WEALTH. 

§ 1. The three preceding Parts include as detailed a 
view as our limits permit, of what, by a happy generaliza- 
tion of a mathematical phrase, has been called the Statics 
of the subject. "We have surveyed the field of economical 
facts, and have examined how they stand related to one an- 
other as causes and effects ; what circumstances determine 
the amount of production, of employment for labour, of 
capital and population ; what laws regulate rent, profits, and 
wages ; under what conditions and in what proportions 
commodities are interchanged between individuals and be- 
tween countries. We have thus obtained a collective view 
of the economical phenomena of society, considered as ex* 
isting simultaneously. We have ascertained, to a certain 
extent, the principles of their interdependence ; and when 
the state of some of the elements is known, we should now 
be able to infer, in a general way, the contemporaneous 
state of most of the others. All this, however, has only 



272 B00K lY - CHAPTER I. §2. 

put us in possession of the economical laws of a stationary 
and unchanging society. We have still to consider the 
economical condition of mankind as liable to change, and 
indeed (in the more advanced portions of the race, and in 
all regions to which their influence reaches) as at all times 
undergoing progressive changes. We have to consider 
what these changes are, what are their laws, and what their 
ultimate tendencies ; thereby adding a theory of motion to 
our theory of equilibrium — the Dynamics of political econo- 
my to the Statics. 

In this inquiry, it is natural to commence by tracing 
the operation of known and acknowledged agencies. 
Whatever may be the other changes which the economy of 
society is destined to undergo, there is one actually in prog- 
ress, concerning which there can be no dispute. In the 
leading countries of the world, and in all others as they 
come within the influence of those leading countries, there 
is at least one progressive movement which continues with 
little interruption from year to year and from generation to 
generation ; a progress in wealth ; an advancement in what 
is called material prosperity. All the nations which we 
are accustomed to call civilized, increase gradually in pro- 
duction and in population : and there is no reason to doubt, 
that not only these nations will for some time continue so 
to increase, but that most of the other nations of the world, 
including some not yet founded, will successively enter 
upon the same career. It will, therefore, be our first object 
to examine the nature and consequences of this progressive 
change ; the elements which constitute it, and the effects it- 
produces on the various economical facts of which we have 
been tracing the laws, and especially on wages, profits 
rents, values, and prices. 

§ 2. Of the features which characterize this progressive 
economical movement of civilized nations, that which first 
excites attention, through its intimate connexion with the 
phenomena of Production, is the perpetual, and so far as 



PROGRESSIVE STATE OF WEALTH. 273 

human foresight can extend, the unlimited, growth of man's 
power over nature. Our knowledge of the properties and 
laws of physical objects shows no sign of approaching its 
ultimate boundaries : it is advancing more rapidly, and in 
a greater number of directions at once, than in any pre- 
vious age or generation, and affording such frequent 
glimpses of unexplored fields beyond, as to justify the 
belief that our acquaintance with nature is still almost in 
its infancy. This increasing physical knowledge is now, 
too, more rapidly than at any former period, converted, by 
practical ingenuity, into physical power. The most mar- 
vellous of modern inventions, one which realizes the imagi- 
nary feats of the magician, not metaphorically but literally 
— the electro-magnetic telegraph — sprang into existence but 
a few years after the establishment of the scientific theory 
which it realizes and exemplifies. Lastly, the manual part 
of these great scientific operations is now never wanting to 
the intellectual : there is no difficulty in finding or forming, 
in a sufficient number of the working hands of the commu- 
nity, the skill requisite for executing the most delicate pro- 
cesses of the application of science to practical uses. From 
this union of conditions, it is impossible not to look forward 
to a vast multiplication and long succession of contrivances 
for economizing labour and increasing its produce; and to 
an ever wider diffusion of the use and benefit of those con- 
trivances. 

Another change, which has always hitherto character- 
ized, and will assuredly continue to characterize, the prog- 
ress of civilized society, is a continual increase of the secu- 
rity of person and property. The people of every country 
in Europe, the most backward as well as the most ad- 
vanced, are, in each generation, better protected against 
the violence and rapacity of one another, both by a more 
efficient judicature and police for the suppression of private 
crime, and by the decay and destruction of those mischiev- 
ous privileges which enabled certain classes of the com- 
munity to prey with impunity upon the rest. They are 



274: BOOK IV. CHAPTER I. §2. 

also, in every generation, better protected, either by insti- 
tutions or by manners and opinion, against arbitrary exer- 
cise of the power of government. Even in semi-barbarous 
Russia, acts of spoliation directed against individuals, who 
have not made themselves politically obnoxious, are not 
supposed to be now so frequent as much to affect any per- 
son's feelings of security. Taxation, in all European coun- 
tries, grows less arbitrary and oppressive, both in itself and 
in the manner of levying it. Wars, and the destruction 
they cause, are now usually confined, in almost every 
country, to those distant and outlying possessions at which 
it comes into contact with savages. Even the vicissitudes 
of fortune which arise from inevitable natural calamities, 
are more and more softened to those on whom they fall, by 
the continual extension of the salutary practice of insur- 
ance. 

Of this increased security, one of the most unfailing 
effects is a great increase both of production and of accumu- 
lation. Industry and frugality cannot exist, where there is 
not a preponderant probability that those who labour and 
spare will be permitted to enjoy. And the nearer this 
probability approaches to a certainty, the more do industry 
and frugality become pervading qualities in a people. Ex- 
perience has shown that a large proportion of the results of 
labour and abstinence may be taken away by fixed taxa- 
tion j without impairing, and sometimes even with the effect 
of stimulating, the qualities from which a great production 
and an abundant capital take their rise. But those 
qualities are not proof against a high degree of uncertainty. 
The government may carry off a part ; but there must be 
assurance that it will not interfere, nor suffer any one to 
interfere, with the remainder. 

One of the changes which most infallibly attend the prog- 
ress of modern society, is an improvement in the business 
capacities of the general mass of mankind. I do not mean 
that the practical sagacity of an individual human being is 
greater than formerly. I am inclined to believe that eco- 



PROGRESSIVE STATE OF WEALTH. 275 

i 
nomical progress has hitherto had even a contrary effect. A 

person of good natural endowments, in a rude state of 
society, can do a greater number of things tolerably well, 
has a greater power of adapting means to ends, is more 
capable of extricating himself and others from an unforeseen 
embarrassment, than ninety-nine in a hundred of those who 
have known only what is called the civilized form of life. 
How far these points of inferiority of faculties are compen- 
sated, and by what means they might be compensated still 
more completely, to the civilized man as an individual be- 
ing, is a question belonging to a different inquiry from the 
present. But to civilized human beings collectively consid- 
ered, the compensation is ample. What is lost in the sep- 
arate efficiency of each, is far more than made up by the 
greater capacity of united action. In proportion as they put 
off the qualities of the savage, they become amenable to dis- 
cipline ; capable of adhering to plans concerted beforehand, 
and about which they may not have been consulted ; of 
subordinating their individual caprice to a preconceived 
determination, and performing severally the parts allotted 
to them in a combined undertaking. Works of all sorts, 
impracticable to the savage or the half-civilized, are daily 
accomplished by civilized nations, not by any greatness of 
faculties in the actual agents, but through the fact that 
each is able to rely with certainty on the others for the por- 
tion of the work which they respectively undertake. The 
peculiar characteristic, in short, of civilized beings, is the 
capacity of co-operation ; and this like other faculties, tends 
to improve by practice, and becomes capable of assuming a 
constantly wider sphere of action. 

Accordingly there is no more certain incident of the 
progressive change taking place in society, than the contin- 
ual growth of the principle and practice of co-operation. 
Associations of individuals voluntarily combining their small 
contributions, now perform works, both of an industrial and 
of many .other characters, which no one person or small 
number of persons are rich enough to accomplish, or for the 



276 BOOK IV. CHAPTER I. § 2. . 

performance of which the few persons capable of accom. 
plishing them were formerly enabled to exact the most in- 
ordinate remuneration. As wealth increases and business 
capacity improves, we may look forward to a great exten- 
sion of establishments, both for industrial and other pur- 
poses, formed by the collective contributions of large 
numbers ; establishments like those known by the technical 
name of joint-stock companies, or the associations less form- 
ally constituted, which are so numerous in England, to raise 
funds for public or philanthropic objects. 

The progress which is to be expected in the physical 
sciences and arts, combined with the greater security of 
property, and greater freedom in disposing of it, which are 
obvious features in the civilization of modern nations, and 
with the more extensive and more skilful employment of 
the joint-stock principle, afford space and scope for an 
indefinite increase of capital and production, and for the 
increase of population which is its ordinary accompaniment. 
That the growth of population will overpass the increase of 
production, there is not much reason to apprehend ; and 
that it should even keep pace with it, is inconsistent with 
the supposition of any real improvement in the poorest 
classes of the people. It is, however, quite possible that 
there might be a great progress in industrial improvement, 
and in the signs of what is commonly called national pros- 
perity ; a great increase of aggregate wealth, and even, in 
some respects, a better distribution of it ; that not only the 
rich might grow richer, but many of the poor might grow 
rich, that the intermediate classes might become more 
numerous and powerful, and the means of enjoyable exis- 
tence be more and more largely diffused, while yet the great 
class at the base of the whole might increase in numbers 
only, and not in comfort nor in cultivation. We must, 
therefore, in considering the effects of the progress of indus- 
try, admit as a supposition, however greatly we deprecate 
as a fact, an increase of population as long-continued, as 



PROGRESSIVE STATE OF WEALTH. 277 

indefinite, and possibly even as rapid, as the increase of pro- 
duction and accumulation. 

"With these preliminary observations on the causes of 
change at work in a society which is in a state of econom- 
ical progress, I proceed to a more detailed examination 
of the changes themselves. 



CHAPTER II. 

INFLUENCE OF THE PROGRESS OF INDUSTRY AND POPU- 
LATION, ON VALUES AND PRICES. 

§ 1. The changes which the progress of industry 
causes or presupposes in the circumstances of production, 
are necessarily attended with changes in the values of com- 
modities. 

The permanent values of all things which are neither 
under a natural nor under an artificial monopoly, depend, 
as we have seen, on their cost of production. But the 
increasing power which mankind are constantly acquiring 
over nature, increases more and more the efficiency of 
human exertion, or in other words, diminishes cost of pro- 
duction. All inventions by which a greater quantity of any 
commodity can be produced witli the same labour, or the 
same quantity with less labour, or which abridge the pro- 
cess, so that the capital employed needs not be advanced 
for so long a time, lessen the cost of production of the com- 
modity. As, however, value is relative; if inventions and 
improvements in production were made in all commodities, 
and all in the same degree, there would be no alteration in 
values. Things would continue to exchange for each other 
at the same rates as before ; and mankind would obtain a 
greater quantity of all things in return for their labour 
and abstinence, without having that greater abundance 
measured and declared (as it is when it affects only one 
thing) by the diminished exchange value of the commodity. 

As for prices, in these circumstances they would be af- 



INFLUENCE OF INDUSTRIAL PROGRESS ON PRICES. 279 

fected or not, according as the improvements in production 
did or did not extend to the precious metals. If the mate- 
rials of money were an exception to the general diminution 
of cost of production, the values of all other things would 
fall in relation to money, that is, there would be a fall of 
general prices throughout the world. But if money, like 
other things, and in the same degree as other things, were 
obtained in greater abundance and cheapness, prices would 
be no more affected than values would ; and there would 
be no visible sign, in the state of the markets, of any of the 
changes which had taken place ; except that there would 
be (if people continued to labour as much as before) a 
greater quantity of all sorts of commodities, circulated at 
the same prices by a greater quantity of money. 

Improvements in production are not the only circum- 
stance accompanying the progress of industry, which 
tends to diminish the cost of producing, or at least of 
obtaining, commodities. Another circumstance is the 
increase of intercourse between different parts of the world. 
As commerce extends, and the ignorant attempts to restrain 
it by tariffs become obsolete, commodities tend more and 
more to be produced in the places in which their production 
can be carried on at the least expense of labour and capital 
to mankind. As civilization spreads, and security of person 
and property becomes established, in parts of the world 
which have not hitherto had that advantage, the productive 
capabilities of those places are called into fuller activity, for 
the benefit both of their own inhabitants and of foreigners. 
The ignorance and misgovernment in which many of the 
regions most favoured by nature are still grovelling, afford 
work, probably, for many generations before those countries 
will be raised even to the present level of the most civil- 
ized parts of Europe. Much will also depend on the 
increasing migration of labour and capital to unoccupied 
parts of the earth, of which the soil, climate, and situation 
are found, by the ample means of exploration now possess- 
ed, to promise not only a large return to industry, but great 



280 BOOK IV. CHAPTER II. § 2. 

facilities of producing commodities suited to the markets of 
old countries. Much, as the collective industry of the earth 
is likely to be increased in efficiency by the extension of 
science and of the industrial arts, a still more active source 
of increased cheapness of production will be found, prob- 
ably, for some time to come, in the gradually unfolding 
consequences of Free Trade, and in the increasing scale on 
which Emigration and Colonization will be carried on. 

From the causes now enumerated, unless counteracted 
by others, the progress of things enables a country to obtain 
at less and less of real cost, not only its own productions 
but those of foreign countries. Indeed, whatever diminishes 
the cost of its own productions, when of an exportable char- 
acter, enables it, as we have already seen, to obtain its 
imports at less real cost. 

§ 2. But is it the fa^.t, that these tendencies are not 
counteracted ? Has the progress of wealth and industry uo 
effect in regard to cost of production, but to diminish it ? 
Are no causes of an opposite character brought into opera- 
tion by the same progress, sufficient in. some cases not only 
to neutralize but to overcome the former, and convert the 
descending movement of cost of production into an ascend- 
ing movement ? We are already aware that there are such 
causes, and that, in the case of the most important classes of 
commodities, food and materials, there is a tendency dia- 
metrically opposite to that of which we have been speaking. 
The cost of production of these commodities tends to in- 
crease. 

This is not a property inherent in the commodities 
themselves. If population were stationary, and the prod- 
uce of the earth never needed to be augmented in quan- 
tity, there would be no cause for greater cost of production. 
Mankind would, on the contrary, have the full benefit of all 
improvements in agriculture, or in the arts subsidiary to it, 
and there would be no difference, in this respect, between 
the products of agriculture and those of manufactures. 



INFLUENCE OF INDUSTRIAL PROGRESS ON PRICES. 281 

The only products of industry which, if population did not 
increase, would be liable to a real increase of cost of pro- 
duction, are those which, depending on a material which is 
not renewed, are either wholly or partially exhaustible ; 
such as coal, and most if not all metals ; for even iron, the 
most abundant as well as most useful of metallic products, 
which forms an ingredient of most minerals and of almost 
all rocks, is susceptible of exhaustion so far as regards its 
richest and most tractable ores. 

When, however, population increases, as it has never yet 
failed to do when the increase of industry and of the means 
of subsistence made room for it, the demand for most of the 
productions of the earth, and particularly for food, increases 
in a corresponding proportion. And then conies into effect 
that fundamental law of production from the soil, on which 
we have so frequently had occasion to expatiate ; the law, 
that increased labour, in any given state of agricultural 
skill, is attended with a less than proportional increase of 
produce. The cost of production of the fruits of the earth 
increases, cceteris paribus, with every increase of the de- 
mand. 

No tendency of a like kind exists with respect to manu- 
factured articles. The tendency is in the contrary direction. 
The larger the scale on which manufacturing operations are 
carried on, the more cheaply they can in general be per- 
formed. Mr. Senior has gone the length of enunciating as an 
inherent law of manufacturing industry, that in it increased 
production takes place at a smaller cost, while in agricul- 
tural industry increased production takes place at a greater 
cost. I cannot think, however, that even in manufactures, 
increased cheapness follows increased production by any- 
thing amounting to a law. It is a probable and usual, but 
not a necessary, consequence. 

As manufactures, however, depend for their materials 
either upon agriculture, or mining, or the spontaneous prod- 
uce of the earth, manufacturing industry is subject, in 
respect of one of its essentials, to the same law as agricul- 



282 B00K IV - CHAPTER II. §3 

ture. But the crude material generally forms so small a 
portion of the total cost, that any tendency which may exist 
to a progressive increase in that single item, is much over- 
balanced by the diminution continually taking place in all 
the other elements ; to which diminution it is impossible at 
present to assign any limit. 

The tendency, then, being to a perpetual increase of the 
productive power of labour in manufactures, while in agri- 
culture and mining there is a conflict between two tenden- 
cies, the one towards an increase of productive power, the 
other towards a diminution of it, the cost of production 
being lessened by every improvement in the processes, and 
augmented by every addition to population ; it follows that 
the exchange values of manufactured articles, compared 
with the products of agriculture and of mines, have, as 
population and industry advance, a certain and decided 
tendency to fall. Money being a product of mines, it may 
also be laid down as a rule, that manufactured articles 
tend, as society advances, to fall in money price. The 
industrial history of modern nations, especially during the 
last hundred years, fully bears out this assertion. 

§ 3. Whether agricultural produce increases in absolute 
as well as comparative cost of production, depends on the 
conflict of the two antagonist agencies, increase of popula- 
tion, and improvement in agricultural skill. In some, per- 
haps in most, states of society, (looking at the whole surface 
of the earth,) both agricultural skill and population are either 
stationary, or increase very slowly, and the cost of produc- 
tion of food, therefore, is nearly stationary. In a society 
which is advancing in wealth, population generally in- 
creases faster than agricultural skill, and food consequently 
tends to become more costly ; but there are times when a 
strong impulse sets in towards agricultural improvement. 
Such an impulse has shown itself in Great Britain during 
the last fifteen or twenty years. In England and Scotland 
agricultural skill has of late increased considerably faster 
than population, insomuch that food and other agricultural 



INFLUENCE OF INDUSTRIAL PROGRESS ON PRICES. 283 

produce, notwithstanding the increase of people, can be 
grown at less cost than they were thirty years ago : and the 
abolition of the Corn Laws has given an additional stimulus 
to the spirit of improvement. In some other countries, and 
particularly in France, the improvement of agriculture 
gains ground still more decidedly upon population, because 
though agriculture, except in a few provinces, advances 
slowly, population advances still more slowly, and even 
with increasing slowness ; its growth being kept down, not 
by poverty, which is diminishing, but by prudence. 

Which of the two conflicting agencies is gaining upon 
the other at any particular time, might be conjectured with 
tolerable accuracy from the money price of agricultural 
produce (supposing bullion not to vary materially in value), 
provided a sufficient number of years could be taken, to 
form an average independent of the fluctuations of seasons. 
This, however, is hardly practicable, since Mr. Tooke has 
shown that even so long a period as half a century may in- 
clude a much greater proportion of abundant and a smaller 
of deficient seasons, than is properly due to it. A mere 
average, therefore, might lead to conclusions only the more 
misleading, for their deceptive semblance of accuracy. There 
would be less danger of error in taking the average of only 
a small number of years, and correcting it by a conjectural 
allowance for the character of the seasons, than in trusting 
to a longer average without any such correction. It is 
hardly necessary to add, that in founding conclusions on 
quoted prices, allowance must also be made as far as possi- 
ble for any changes in the general exchange value of the 
precious metals.* 

§ 4. Thus far, of the effect of the progress of society on 
the permanent or average values and prices of commodities. 
It remains to be considered, in what manner the same prog- 

* A still better criterion, perhaps, than that suggested in the text, would be 
the increase or diminution of the amount of the labourer's wages estimated in 
agricultural produce. 



284 B 00K IV. CHAPTER II. §4. 

ress affects their fluctuations. Concerning the answer to 
this question there can be no doubt. It tends in a very 
high degree to diminish them. 

In poor and backward societies, as in the East, and in 
Europe during the middle ages, extraordinary differences in 
the price of the same commodity might exist in places not 
very distant from each other, because the want of roads and 
canals, the imperfection of marine navigation, and the inse- 
curity of communications generally, prevented things from 
being transported from the places where they were cheap 
to those where they were dear. The things most liable to fluc- 
tuations in value, those directly influenced by the seasons, 
and especially food, were seldom carried to any great dis- 
tances. Each locality depended, as a general rule, on its own 
produce and that of its immediate neighbourhood. In most 
years, accordingly, there was, in some part or other of any 
large country, a real dearth. Almost every season must be 
unpropitious to some among the many soils and climates to 
be found in an extensive tract of country ; but as the same 
season is also in general more than ordinarily favourable to 
others, it is only occasionally that the aggregate produce of 
the whole country is deficient, and even then in a less 
degree than that of many separate portions ; while a defi- 
ciency at all considerable, extending to the whole world, is a 
thing almost unknown. In modern times, therefore, there 
is only dearth, where there formerly would have been 
famine, and sufficiency everywhere when anciently there 
would have been scarcity in some places and superfluity in 
others. 

The same change has taken place with respect to all 
other articles of commerce. The safety and cheapness of 
communications, which enable a deficiency in one place to 
be supplied from the surplus of another, at a moderate or 
even a small advance on the ordinary price, render the fluc- 
tuations of prices much less extreme than formerly. This 
effect is much promoted by the existence of large capitals, 
belonging to what are called speculative merchants, whose 



INFLUENCE OF INDUSTRIAL PROGRESS ON PRICES. 285 

business it is to buy goods in order to resell them at a profit. 
These dealers naturally buying things when they are 
cheapest, and storing them up to be brought again into the 
market when the price has become unusually high ; the ten- 
dency of their operations is to equalize price, or at least to 
moderate its inequalities. The prices of things are neither 
so much depressed at one time, nor so much raised at 
another, as they would be if speculative dealers did not 
exist. 

Speculators, therefore, have a highly useful office in the 
economy of society ; and (contrary to common opinion) the 
most useful portion of the class are those who speculate in 
commodities affected by the vicissitudes of seasons. If there 
were no corn dealers, not only would the price of corn be 
liable to variations much more extreme than at present, but 
in a deficient season the necessary supplies might not be 
forthcoming at all. Unless there were speculators in corn, 
or unless, in default of dealers, the farmers became specula- 
tors, the price in a season of abundance would fall without 
any limit or check, except the wasteful consumption that 
would invariably follow. That any part of the surplus of 
one year remains to supply the deficiency of another, is 
owing either to farmers who withhold corn from the market, 
or to dealers who buy it when at the cheapest and lay it up 
in store. 

§ 5. Among persons who have not much considered 
the subject, there is a notion that the gains of speculators 
are often made by causing an artificial scarcity ; that they 
create a high price by their own purchases, and then profit 
by it. This may easily be shown to be fallacious. If a 
corn-dealer makes purchases on speculation, and produces a 
rise, when there is neither at the time nor afterwards any 
cause for a rise of price except his own proceedings ; he no 
doubt appears to grow richer as long as his purchases con- 
tinue, because he is a holder of an article which is quoted at 
a higher and higher price : but this apparent gain only 



286 B00K IV - CHAPTER II. §5. 

seems within his reach so long as he does not attempt to 
realize it. If he has bought, for instance, a million of 
quarters, and by withholding them from the market, has 
raised the price ten shillings a quarter ; just so much as the. 
price has been raised by withdrawing a million quarters, will 
it be lowered by bringing them back, and the best that he can 
hope is that he will lose nothing except interest and his ex- 
penses. If by a gradual and cautious sale he is able to 
realize, on some portion of his stores, a part of the increased 
price, so also he will undoubtedly have had to pay a part 
of that price on some portion of his purchases. He runs 
considerable risk of incurring a still greater loss ; for the 
temporary high price is very likely to have tempted others, 
who had no share in causing it, and who might otherwise 
not have found their way to this market at all, to bring 
their corn there, and intercept a part of the advantage. So 
that instead of profiting by a scarcity caused by himself, he 
is by no means unlikely, after buying in an average market, 
to be forced to sell in a superabundant one. 

As an individual speculator cannot gain by a rise of 
price solely of his own creating, so neither can a number of 
speculators gain collectively by a rise, which their opera- 
tions have artificially produced. Some among a number of 
speculators may gain, by superior judgment or good fortune 
in selecting the time for realizing, but they make this gain 
at the expense, not of the consumer, but of the other specu- 
lators who are less judicious. They, in fact, convert to their 
own benefit the high price produced by the speculations of 
the others, leaving to these the loss resulting from the recoil. 
It is not to be denied, therefore, that speculators may enrich 
themselves by other people's loss. But it is by the losses 
of other speculators. As much must have been lost by one 
set of dealers as is gained by another set. 

When a speculation in a commodity proves profitable to 
the speculators as a body, it is because in the interval be- 
tween their buying and reselling, the price rises from some 
cause independent of them, their only connection with it 



INFLUENCE OF INDUSTRIAL PROGRESS ON PRICES. 287 

consisting in having foreseen it. In this case, their pur- 
chases make the price begin to rise sooner than it otherwise 
would do, thus spreading the privation of the consumers 
over a longer period, but mitigating it at the time of its 
greatest height : evidently to the general advantage. In 
this, however, it is assumed that they have not overrated 
the rise which they looked forward to. For it often hap- 
pens that speculative purchases are made in the expectation 
of some increase of demand, or deficiency of supply, which 
after all does not occur, or not to the extent which the 
speculator expected. In that case the speculation, instead 
of moderating fluctuations, has caused a fluctuation of price 
which otherwise would not have happened, or aggravated 
one which would. But in that case the speculation is a 
losing one, to the speculators collectively, however much 
some individuals may gain by it. All that part of the rise 
of price by which it exceeds what there are independent 
grounds for, cannot give to the speculators as a body any 
benefit, since the price is as much depressed by their sales 
as it was raised by their purchases ; and while they gain 
nothing by it, they lose, not only their trouble and expen- 
ses, but almost always much more, through the effects 
incident to the artificial rise of price, in checking consump- 
tion, and bringing forward supplies from unforeseen quarters. 
The operations, therefore, of speculative dealers, are useful 
to the public whenever profitable to themselves ; and 
though they are sometimes injurious to the public, by 
heightening the fluctuations which their more usual office is 
to alleviate, yet whenever this happens the speculators aro 
the greatest losers. The interest, in short, of the specula 
tors as a body, coincides with the interest of the public ; and 
as they can only fail to serve the public interest in propor- 
tion as they miss their own, the best way to promote the 
one is to leave them to pursue the other in perfect freedom. 
I do not deny that speculators may aggravate a local 
scarcity. In collecting corn from the villages to supply 
the towns, they make the dearth penetrate into nooks and 



288 BOOK IV. CHAPTER II. §5. 

corners which might otherwise have escaped from bearing 
their share of it. To buy and resell in the same place, 
tends to alleviate scarcity : to buy in one place and resell 
in another, may increase it in the former of the two places, 
but relieves it in the latter, where the price is higher, and 
which therefore, by the very supposition, is likely to be 
suffering more. And these sufferings always fall hardest 
on the poorest consumers, since the rich, by outbidding, 
can obtain their accustomed supply undiminished if they 
choose. To no persons, therefore, are the operations of 
corn-dealers on the whole so beneficial as to the poor. 
Accidentally and exceptionally, the poor may suffer from 
them : it might sometimes be more advantageous to the 
rural poor to have corn cheap in winter, when they are 
entirely dependent on it, even if the consequence were a 
dearth in spring, when they can perhaps obtain partial 
substitutes. But there are no substitutes, procurable at 
that season, which serve in any great degree to replace 
bread-corn as the chief article of food : if there were, its 
price would fall in the spring, instead of continuing, as it 
always does, to rise till the approach of harvest. 

There is an opposition of immediate interest, at the 
moment of sale, between the dealer in corn and the con- 
sumer, as there always is between the seller and the buyer : 
and a time of dearth being that in which the speculator 
makes his largest profits, he is an object of dislike and jeal- 
ousy at that time, to those who are suffering while he is 
gaining. It is an error, however, to suppose that the corn- 
dealer's business affords him any extraordinary profit : he 
makes his gains not constantly, but at particular times, and 
they must therefore occasionally be great, but the chances 
of profit in a business in which there is so much com- 
petition, cannot on the whole be greater than in other 
employments. A year of scarcity, in which great gains are 
made by corn-deaiers, rarely conies to an end without a 
recoil which places many of them in the list of bankrupts. 
There have been few more promising seasons for corn- 



INFLUENCE OF INDUSTRIAL PROGRESS ON PRICES. 289 

dealers than the year 1847, and seldom was there a greater 
break-up among the speculators than in the autumn of that 
year. The chances of failure, in this most precarious trade, 
are a set-off against great occasional profits. If the corn- 
dealer were to sell his stores, during a dearth, at a lower 
price than that which the competition of the consumers 
assigns to him, he would make a sacrifice, to charity or 
philanthropy, of the fair profits of his employment, which 
may be quite as reasonably required from any other person 
of equal means. His business being a useful one, it is the 
interest of the public that the ordinary motives should exist 
for carrying it on, and that neither law nor opinion should 
prevent an operation beneficial to the public from being 
attended with as much private advantage as is compatible 
with full and free competition. 

It appears, then, that the fluctuations of values and 
prices arising from variations of supply, or from alterations 
in real (as distinguished from speculative) demand, may be 
expected to become more moderate as society advances. 
With regard to those which arise from miscalculation, and 
especially from the alternations of undue expansion and 
excessive contraction of credit, which occupy so conspicuous 
a place among commercial phenomena, the same thing can- 
not be affirmed with equal confidence. Such vicissitudes, 
beginning with irrational speculation and ending with a com- 
mercial crisis, have not hitherto become either less frequent 
or less violent with the growth of capital and extension of 
industry. Rather they may be said to have become more 
so : in consequence, as is often said, of increased com- 
petition ; but, as I prefer to say, of a low rate of profits 
and interest, which makes capitalists dissatisfied with the 
ordinary course of safe mercantile gains. The connexion 
of this low rate of profit with the advance of population 
and accumulation, is one of the points to be illustrated in 
the ensuing chapters. 



58 



CHAPTEK III. 

INFLUENCE OF THE PROGRESS OF INDUSTRY AND POPULATION, 
ON RENTS, PROFITS, AND WAGES. 

§ 1. Continuing the inquiry into the nature of the 
economical changes taking place in a society which is in a 
state of industrial progress, we shall next consider what is 
the effect of that progress on the distribution of the produce 
among the various classes who share in it. "We may confine 
our attention to the system of distribution which is the most 
complex, and which virtually includes all others — that in 
which the produce of manufactures is shared between two 
classes, labourers and capitalists, and the produce of agri- 
culture among three, labourers, capitalists, and landlords. 

The characteristic features of what is commonly meant 
by industrial progress, resolve themselves mainly into three, 
increase of capital, increase of population, and improvements 
in production ; understanding the last expression in its 
widest sense, to include the process of procuring com- 
modities from a distance, as well as that of producing 
them. The other changes which take place are chiefly 
consequences of these ; as, for example, the tendency to a 
progressive increase of the cost of production of food ; 
arising from an increased demand, which may be occasioned 
either by increased population, or by an increase of capital 
and wages, enabling the poorer classes to increase their 
consumption. It will be convenient to set out by con- 
sidering each of the three causes, as operating separately ; 



INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 291 

after which we can suppose them combined in any manner 
we think fit. 

Let us first suppose that population increases, capital 
and the arts of production remaining stationary. One of 
the effects of this change of circumstances is sufficiently 
obvious : wages will fall ; the labouring class will be reduced 
to an inferior condition. The state of the capitalist, on 
the contrary, will be improved. With the same capital, he 
can purchase more labour, and obtain more produce. His 
rate of profit is increased. The dependence of the rate of 
profits on the cost of labour is here verified ; for the 
labourer obtaining a diminished quantity of commodities, 
and no alteration being supposed in the circumstances of 
their production, the diminished quantity represents a 
diminished cost. The labourer obtains not only a smaller 
real reward, but the product of a smaller quantity of labour. 
The first circumstance is the important one to himself, the 
last to his employer. 

Nothing has occurred, thus far, to affect in any way the 
value of any commodity ; and no reason, therefore, has yet 
shown itself, why rent should be either raised or lowered. 
But if we look forward another stage in the series of effects, 
we may see our way to such a consequence. The labourers 
have increased in numbers : their condition is reduced in 
the same proportion ; the increased numbers divide among 
them only the produce of the same amount of labour as 
before. But they may economize in their other comforts, 
and not in their food : each may consume as much food, 
and "of as costly a quality, as previously ; or they may 
submit to a reduction, but not in proportion to the in- 
crease of numbers. On this supposition, notwithstanding 
the diminution of real wages, the increased population will 
require an increased quantity of food. But since industrial 
skill and knowledge are supposed to be stationary, more 
food can only be obtained by resorting to worse land, or to 
methods of cultivation which are less productive in propor- 
tion to the outlay. Capital for this extension of agriculture 



292 B00K ly - CHAPTER III. §1. 

will not be wanting ; for though, by hypothesis, no addition 
takes place to the capital in existence, a sufficient amount 
can be spared from the industry which previously supplied 
the other and less pressing wants which the labourers have 
been obliged to curtail. The additional supply of food, 
therefore, will be produced, but produced at a greater cost ; 
and the exchange value of agricultural produce must rise. 
It may be objected, that profits having risen, the extra cost 
of producing food can be defrayed from profits, without any 
increase of price. It could, undoubtedly, but it will not : 
because if it did, the agriculturist would be placed in an 
inferior position to other capitalists. The increase of 
profits, being the effect of diminished wages, is common to 
all employers of labour. The increased expenses arising 
from the necessity of a more costly cultivation, affect the 
agriculturist alone. For this peculiar burthen he must be 
peculiarly compensated, whether the general rate of profit be 
high or low. He will not submit indefinitely to a deduction 
from his profits, to which other capitalists are not subject. 
He will not extend his cultivation by laying out fresh 
capital, unless for a return sufficient to yield him as high a 
profit as could be obtained by the same capital in other 
investments. The value, therefore, of his commodity will 
rise, and rise in proportion to the increased cost. The far- 
mer will thus be indemnified for the burthen which is 
peculiar to himself, and will also enjoy the augmented rate 
of profit which is common to all capitalists. 

It follows, from principles with which we are already 
familiar, that in these circumstances rent will rise. Any 
land can afford to pay, and under free competition will pay, 
a rent equal to the excess of its produce above the return to 
an equal capital on the worst land, or under the least fa- 
vourable conditions. Whenever, therefore, agriculture is 
driven to descend to worse land, or more onerous processes, 
rent rises. Its rise will be twofold, for, in the first place, 
rent in kind, or corn rent, will rise ; and in the second, 
since the value of agricultural produce has also risen, rent, 




INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 293 

estimated in manufactured or foreign commodities (which is 
represented cceteHs jjarlhus by money rent), will rise still 
more. 

The steps of the process (if, after what has been formerly 
said, it is necessary to retrace them) are as follows. Corn 
rises in price, to repay with the ordinary profit the capital 
required for producing additional corn on worse land or by 
more costly processes. So far as regards this additional 
corn, the increased price is but an equivalent for the ad- 
ditional expense ; but the rise, extending to all corn, affords 
on all, except the last produced, an extra profit. If the far- 
mer was accustomed to produce 100 quarters of wheat at 
405., and 120 quarters are now required, of which the last 
twenty cannot be produced under 45s., he obtains the extra 
five shillings on the entire 120 quarters, and not on the last 
twenty alone. He has thus an extra 25Z. beyond the 
ordinary profits, and this, in a state of free competition, he 
will not be able to retain. He cannot however be com- 
pelled to give it up to the consumer, since a less price than 
45«. would be inconsistent with the production of the last 
twenty quarters. The price, then, will remain at 45s., and 
the 25Z. will be transferred by competition not to the con- 
sumer but to the landlord. A rise of rent is therefore 
inevitably consequent on an increased demand for agricul- 
tural produce, when unaccompanied by increased facilities 
for its production. A truth which, after this final illus- 
tration, we may henceforth take for granted. 

The new element now introduced — an increased demand 
for food — besides occasioning an increase of rent, still fur- 
ther disturbs the distribution of the produce between 
capitalists and labourers. The increase of population will 
have diminished the reward of labour : and if its cost is 
diminished as greatly as its real remuneration, profits will 
be increased by the full amount. If, however, the increase 
of population leads to an increased production of food, 
which cannot be supplied but at an enhanced cost of pro- 
duction, the cost of labour will not be so much diminished 



294 BOOK IV. CHAPTER III. §2. 

as the real reward of it, and profits, therefore, will not be so 
much raised. It is even possible that they might not be 
raised at all. The labourers may previously have been so 
well provided for, that the whole of what they now lose 
may be struck off from their other indulgences, and they 
may not, either by necessity or choice, undergo any re- 
duction in the quantity or quality of their food. To pro- 
duce the food for the increased number may be attended 
with such an increase of expense, that wages, though reduced 
in quantity, may represent as great a cost, may be the prod- 
uct of as much labour, as before, and the capitalist may 
not be at all benefited. On this supposition the loss to the 
labourer is partly absorbed in the additional labour required 
for producing the last instalment of agricultural produce ; 
and the remainder is gained by the landlord, the only sharer 
who always benefits by an increase of population. 

§ 2. Let us now reverse our hypothesis, and, instead 
of supposing capital stationary and population advancing, 
let us suppose capital advancing and population stationary ; 
the facilities of production, both natural and acquired, 
being, as before, unaltered. The real wages of labour, 
instead of falling, will now rise ; and since the cost of pro- 
duction of the things consumed by the labourer is not dimin- 
ished, this rise of wages implies an equivalent increase of 
the cost of labour, and diminution of profits. To state the 
same deduction in other terms ; the labourers not being 
more numerous, and the productive power of their labour 
being only the same as before, there is no increase of the 
produce ; the increase of wages, therefore, must be at the 
charge of the capitalists. It is not impossible that the cost 
of labour might be increased in even a greater ratio than its 
real remuneration. The improved condition of the labourers 
may increase the demand for food. The labourers may 
have been so ill off before, as not to have food enough ; and 
may now consume more : or they may choose to expend 
their increased means partly or wholly in a more costly 



INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 295 

quality of food, requiring more labour and more land ; 
wheat, for example, instead of oats or potatoes. This ex- 
tension of agriculture implies, as usual, a greater cost of 
production and a higher price, so that besides the increase 
of the cost of labour arising from the increase of its reward, 
there will be a further increase (and an additional fall of 
profits) from the increased costliness of the commodities of 
which that reward consists. The same causes will produce 
a rise of rent. What the capitalists lose, above what the 
labourers gain, is partly transferred to the landlord, and 
partly swallowed up in the cost of growing food on worse 
land or by a less productive process. 

§ 3. Having disposed of the two simple cases, an in- 
creasing population and stationary capital, and an increasing 
capital and stationary population, we are prepared to take 
into consideration the mixed case, in which the two elements 
of expansion are combined, both population and capital in- 
creasing. If either element increases faster than the other, 
the case is so far assimilated with one or other of the two 
preceding : we shall suppose them, therefore, to increase 
with equal rapidity ; the test of equality being, that each 
labourer obtains the same commodities as before, and the 
same quantity of those commodities. Let us examine what 
will be the effect, on rent and profits, of this double prog- 
ress. 

Population having increased, without any falling off in 
the labourer's condition, there is of course a demand for 
more food. The arts of production being supposed station- 
ary, this food must be produced at an increased cost. To 
compensate for this greater cost of the additional food, the 
price of agricultural produce must rise. The rise extending 
over the whole amount of food produced, though the in- 
creased expenses only apply to a part, there is a greatly 
increased extra profit, which, by competition, is transferred 
to the landlord. Rent will rise, both in quantity of produce 
and in cost ; while wages, being supposed to be the same 



296 B00K IV - CHAPTER III. §4. 

in quantity, will be greater in cost. The labourer obtaining 
the same amount of necessaries, money wages have risen ; 
and as the rise is common to all branches of production, the 
capitalist cannot indemnify himself by changing his em- 
ployment, and the loss must be borne by profits. 

It appears, then, that the tendency of an increase of 
capital and population is to add to rent at the expense of 
profits : though rent does not gain all that profits lose, a 
part being absorbed in increased expenses of production, that 
is, in hiring or feeding a greater number of labourers to obtain 
a given amount of agricultural produce. By profits, must 
of course be understood the rate of profit ; for a lower rate 
of profit on a larger capital may yield a larger gross profit, 
considered absolutely, though a smaller in proportion to the 
entire produce. 

This tendency of profits to fall, is from time to time 
counteracted by improvements in production : whether aris- 
ing from increase of knowledge, or from an increased use 
of the knowledge already possessed. This is the third of 
the three elements, the effects of which on the distribution 
of the produce we undertook to investigate ; and the inves- 
tigation will be facilitated by supposing, as in the case of 
the other two elements, that it operates, in the first in- 
stance, alone. 

§ 4. Let us then suppose capital and population sta- 
tionary, and a sudden improvement made in the arts of 
production ; by the invention of more efficient machines, or 
less costly processes, or by obtaining access to cheaper com- 
modities through foreign trade. 

The improvement may either be in some of the necessa- 
ries or indulgences which enter into the habitual consump- 
tion of the labouring class ; or it may be applicable only to 
luxuries consumed exclusively by richer people. Yery few, 
however, of the great industrial improvements are alto- 
gether of this last description. Agricultural improvements, 
except such as specially relate to some of the rarer and 






INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 297 

more peculiar products, act directly upon the principal ob- 
jects of the labourer's expenditure. The steam-engine, 
and every other invention which affords a manageable 
power, are applicable to all things, and of course to those 
consumed by the labourer. Even the power-loom and the 
spinning-jenny, though applied to the most delicate fabrics, 
are available no less for the coarse cottons and woollens 
worn by the labouring class. All improvements in locomotion 
cheapen the transport of necessaries as well as of luxuries. 
Seldom is a new branch of trade opened, without, either 
directly or in some indirect way, causing some of the articles 
which the mass of the people consume to be either pro- 
duced or imported at smaller cost. It may safely be affirm- 
ed, therefore, that improvements in production generally 
tend to cheapen the commodities on which the wages of the 
laboring class are expended. 

In so far as the commodities affected by an improve- 
ment are those which the labourers generally do not con- 
sume, the improvement has no effect in altering the distri- 
bution of the produce. Those particular commodities, in- 
deed, are cheapened ; being produced at less cost, they fall 
in value and in price, and all who consume them, whether 
landlords, capitalists, or skilled and privileged labourers, 
obtain increased means of enjoyment. The rate of profits' 
however, is not raised. There is a larger gross profit, reck- 
oned in quantity of commodities. But the capital also, if 
estimated in those commodities, has risen in value. The 
profit is the same percentage on the capital that it was be- 
fore. The capitalists are not benefited as capitalists, but as 
consumers^ The landlords and the privileged classes of 
labourers, if they are consumers of the same commodities, 
share the same benefit. 

The case is different with improvements which diminish 
the cost of production of the necessaries of life, or of com- 
modities which enter habitually into the consumption of 
the great mass of labourers. The play of the different forces 
being here rather complex, it is necessary to analyze it with 
some minuteness. 



298 BOOK IV. CHAPTER III. §4. 

As formerly observed,* there are two kinds of agricul- 
tural improvements. Some consist in a mere saving of 
labour, and enable a given quantity of food to be produced 
at less cost, but not on a smaller surface of land than be- 
fore. Others enable a given extent of land to yield not 
only the same produce with less labour, but a greater prod- 
uce ; so that if no greater produce is required, a part of 
the land already under culture may be dispensed with. As 
the part rejected will be the least productive portion, the 
market will thenceforth be regulated by a better description 
of land than what was previously the worst under cultiva- 
tion. 

To place the effect of the improvement in a clear 
light, we must suppose it to take place suddenly, so as to 
leave no time during its introduction, for any increase of 
capital or of population. Its first effect will be a fall of the 
value and price of agricultural produce. This is a necessary 
consequence of either kind of improvement, but especially 
of the last. 

An improvement of the first kind, not increasing the 
produce, does not dispense with any portion of the land ; the 
margin of cultivation (as Dr. Chalmers terms it) remains 
where it was ; agriculture does not recede, either in extent 
of cultivated land, or in elaborateness of methods : and the 
price continues to be regulated by the same land, and by 
the same capital, as before. But since that land or capital, 
and all other land or capital which produces food, now 
yields its produce at smaller cost, the price of food will fall 
proportionally. If one-tenth of the expense of production 
has been saved, the price of produce will fall one-tenth. 

But suppose the improvement to be of the second kind ; 
enabling the land to produce, not only the same corn with 
one-tenth less labour, but a tenth more corn with the same 
labour. Here the effect is still more decided. Cultivation 
can now be contracted, and the market supplied from 
smaller quantity of land. Even if this smaller surface of 

* Supra, vol. L p. 248. 



INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 299 

land were of the same average quality as the larger surface, 
the price would fall one-tenth, because the same produce 
would be obtained with a tenth less labour. But since the 
portion of land abandoned will be the least fertile portion, 
the price of produce will thenceforth be regulated by a bet- 
ter quality of land than before. In addition, therefore, to 
the original diminution of one-tenth in the cost of produc- 
tion, there will be a further diminution, corresponding with 
the recession of the " margin " of agriculture to land of 
greater fertility. There will thus be a twofold fall of price. 

Let us now examine the effect of the improvements, thus 
suddenly made, and the division of the produce ; and in the 
first place, on rent. By the former of the two kinds of im- 
provement, rent would be diminished. By the second, it 
would be diminished still more. 

Suppose that the demand for food requires the cultiva- 
tion of three qualities of land, yielding, on an equal surface, 
and at an equal expense, 100, 80, and 60 bushels of wheat. 
The price of wheat will, on the average, be just sufficient to 
enable the third quality to be cultivated with the ordinary 
profit. The first quality therefore will yield forty and the 
second twenty bushels of extra profit, constituting the rent 
of the landlord. And first, let an improvement be made, 
which, without enabling more corn to be grown, enables 
the same corn to be grown with one-fourth less labour. 
The price of wheat will fall one-fourth, and 80 bushels will 
be sold for the price for which 60 were sold before. But 
the produce of the land which produces 60 bushels is still 
required, and the expenses being as much reduced as the 
price, that land can still be cultivated with the ordinary 
profit. The first and second qualities will therefore con- 
tinue to yield a surplus of 40 and 20 bushels, and corn rent 
will remain the same as before. But corn having fallen in 
price one-fourth, the same corn rent is equivalent to a 
fourth less of money and of all other commodities. So 
far, therefore, as the landlord expends his income in 
manufactured or foreign products, he is one-fourth worse 



300 BOOK IV. CHAPTER III. §4. 

off than before. His income as landlord is reduced to 
three-quarters of its amount : it is only as a consumer of 
corn that he is as well off. 

If the improvement is of the other kind, rent will fall 
in a still greater ratio. Suppose that the amount of prod- 
uce which the market requires, can be grown not only 
with a fourth less labour, but on a fourth less land. If all 
the land already in cultivation continued to be cultivated, 
it would yield a produce much larger than necessary. 
Land, equivalent to a fourth of the produce, must now be 
abandoned ; and as the third quality yielded exactly one- 
fourth, (being 60 out of 240,) that quality will go out of 
cultivation. The 240 bushels can now be grown on land 
of the first and second qualities only ; being, on the first, 
100 bushels plus one-third, or 133^ bushels ; on the second, 
80 bushels plus one-third, or 106-f bushels ; together 240. 
The second quality of land, instead of the third, is now the 
lowest, and regulates the price. Instead of 60, it is suffi- 
cient if 106§ bushels repay the capital with the ordinary 
profit. The price of wheat will consequently fall, not in 
the ratio of 60 to 80, as in the other case, but in the ratio 
of 60 to 106-f. Even this gives an insufficient idea of the 
degree in which rent will be affected. The whole produce 
of the second quality of land will now be required to repay 
the expenses of production. That land, being the worst in 
cultivation, will pay no rent. And the first quality will 
only yield the difference between 133-J bushels and 106$, 
being 26f bushels instead of 40. The landlords collectively 
will have lost 33-J out of 60 bushels in corn rent alone, 
while the value and price of what is left will have been 
diminished in the ratio of 60 to 106f. 

It thus appears, that the interest of the landlord is de- 
cidedly hostile to the sudden and general introduction of 
agricultural improvements. This assertion has been called 
a paradox, and made a ground for accusing its first promul- 
gator, Bicardo, of great intellectual perverseness, to say 
nothing worse. I cannot discern in what the paradox con- 



J 



INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 30l 

sists ; and the obliquity of vision seems to me to be on the 
side of his assailants. The opinion is only made to appear 
absurd by stating it unfairly. If the assertion were that a 
landlord is injured by the improvement of his estate, it 
would certainly be indefensible ; but what is asserted is, 
that he is injured by the improvement of the estates of 
other people, although his own is included. Nobody 
doubts that he would gain greatly by the improvement if 
he could keep it to himself, and unite the benefits, of an 
increased produce from his land, and a price as high as 
before. But if the increase of produce took place simul- 
taneously on all lands, the price would not be as high as 
before ; and there is nothing unreasonable in supposing 
that the landlords would be, not benefited, but injured. It 
is admitted that whatever permanently reduces the price 
of produce diminishes rent : and it is quite in accordance 
with common notions to suppose that if, by the increased 
productiveness of land, less land were required for cultiva- 
tion, its value, like that of any other article for which the 
demand had diminished, would fall. 

I am quite willing to admit that rents have not really 
been lowered by the progress of agricultural improvements ; 
but why ? Because improvement has never in reality been 
sudden, but always slow ; at no time much outstripping, 
and often falling far short of, the growth of capital and popu- 
lation, which tends as much to raise rent, as the other to 
lower it, and which is enabled, as we shall presently see, to 
raise it much higher by means of the additional margin 
afforded by improvements in agriculture. First, however, 
we must examine in what manner the sudden cheapening 
of agricultural produce would affect profits and wages. 

In the beginning, money wages would probably remain 
the same as before, and the labourers would have the full 
benefit of the cheapness. They would be enabled to in- 
crease their consumption either of food or of other articles, 
and would receive the same cost, and a greater quantity. So 
long as this was the case, profits would be unaffected. But 



302 BOOK IV. CHAPTER III. §4. 

the permanent remuneration of the labourers essentially de- 
pends on what we have called their habitual standard ; the 
extent of the requirements which, as a class, they insist on 
satisfying before they choose to have children. If their 
tastes and requirements receive a durable impress from the 
sudden improvement in their condition, the benefit to the 
class will be permanent. But the same cause which enables 
them to purchase greater comforts and indulgences with the 
same wages, would enable them to purchase the same 
amount of comforts and indulgences with lower wages ; 
and a greater population may now exist, without reducing 
the labourers below the condition to which they are accus- 
tomed. Hitherto this and no other has been the use which 
the labourers have commonly made of any increase of their 
means of living ; they have treated it simply as convertible 
into food for a greater number of children. It is probable, 
therefore, that population would be stimulated, and that 
after the lapse of a generation the real wages of labour 
would be no higher than before the improvement : the re 
duction being partly brought about by a fall of money wages, 
and partly through the price of food, the cost of which, from 
the demand occasioned by the increase of population, would 
be again increased. To the extent to which money wages 
fell, profits would rise ; the capitalist obtaining a greater 
quantity of equally efficient labour by the same outlay of 
capital. We thus see that a diminution of the cost of liv- 
ing, whether arising from agricultural improvements or 
from the importation of foreign produce, if the habits and 
requirements of the labourers are not raised, usually lowers 
money wages and rent, and raises the general rate of profit 
What is true of improvements which cheapen the pro- 
duction of food, is true also of the substitution of a cheaper 
for a more costly variety of it. The same land yields to 
the same labour a much greater quantity of human nutri- 
ment in the form of maize or potatoes, than in the form of 
wheat. If the labourers were to give up bread, and feed 
only on those cheaper products, taking as their compensa- 



INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 303 

tion not a greater quantity of other consumable commodi- 
ties, but earlier marriages and larger families, the cost of 
labour would be much diminished, and if labour continued 
equally efficient, profits would rise ; while rent would be 
much lowered, since food for the whole population could 
be raised on half or a third part of the land now sown with 
corn. At the same time, it being evident that land too 
barren to be cultivated for wheat might be made in case of 
necessity to yield potatoes sufficient to support the little 
labour necessary for producing them, cultivation might 
ultimately descend lower, and rent eventually rise higher, 
on a potato or maize system, than on a corn system ; be- 
cause the land would be capable of feeding a much larger 
population before reaching the limit of its powers. 

If the improvement, which we suppose to take place, is 
not in the production of food, but of some manufactured 
article consumed by the labouring class, the effect on wages 
and profits will at first be the same ; but the effect on rent 
very different. It will not be lowered ; it will even, if the 
ultimate effect of the improvement is an increase of popula- 
tion, be raised : in which last case profits will be lowered. 
The reasons are too evident to require statement. 

§ 5. We have considered, on the one hand, the manner 
in which the distribution of the produce into rent, profits, 
and wages, is affected by the ordinary increase of population 
and capital, and on the other, how it is affected by improve- 
ments in production, and more especially in agriculture 
We have found that the former cause lowers profits, and 
raises rent and the cost of labour : while the tendency of 
agricultural improvements is to diminish rent ; and all 
improvements which cheapen any article of the labourer's 
consumption, tend to diminish the cost of labour and to raise 
profits. The tendency of each cause in its separate state 
being thus ascertained, it is easy to determine the tendency 
of the actual course of things, in which the two movements 
are going on simultaneously, capital and population increas- 



304 B00K IV - CHAPTER III. §5. 

ing with tolerable steadiness, while improvements in agri 
cultnre are made from time to time, and the knowledge and 
practice of improved methods become diffused gradually 
through the community. 

The habits and requirements of the labouring classes 
being given (which determine their real wages), rent, profits, 
and money wages at any given time, are the result of the 
composition of these rival forces. If during any period 
agricultural improvement advances faster than population, 
rent and money wages during that period will tend down- 
ward, and profits upward. If population advances more 
rapidly than agricultural improvement, either the labourers 
will submit to a reduction in the quantity or quality of 
their food, or if not, rent and money wages will progres- 
sively rise, and profits will fall. 

Agricultural skill and knowledge are of slow growth, 
and still slower diffusion. Inventions and discoveries, too, 
occur only occasionally, while the increase of population 
and capital are continuous agencies. It therefore seldom 
happens that improvement, even during a short time, has 
so much the start of population and capital as actually to 
lower rent, or raise the rate of profits. There are many 
countries in which the growth of population and capital are 
not rapid, but in these agricultural improvement is less 
active still. Population almost everywhere treads close on 
the heels of agricultural improvement, and effaces its effects 
as fast as they are produced. 

The reason why agricultural improvement seldom lowers 
rent, is that it seldom cheapens food, but only prevents it 
from growing dearer ; and seldom, if ever, throws land out 
of cultivation, but only enables worse and worse land to be 
taken in for the supply of an increasing demand. What is 
sometimes called the natural state of a country which is but 
half cultivated, namely that the land is highly productive, 
and food obtained in great abundance by little labour, is 
only true of unoccupied countries colonized by a civilized 
people. In the United States the worst land in cultivation 



INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 305 

is of a high quality (except sometimes in the immediate 
vicinity of markets or means of conveyance, where a bad 
quality is compensated by a good situation) ; and even if no 
further improvements were made in agriculture or locomo- 
tion, cultivation would have many steps yet to descend, 
before the increase of population and capital would be 
brought to a stand ; but in Europe five hundred years ago, 
though so thinly peopled in comparison to the present 
population, it is probable that the worst land under the 
plough was, from the rude state of agriculture, quite as 
unproductive as the worst land now cultivated ; and that 
cultivation had approached as near to the ultimate limit of 
profitable tillage, in those times as in the present. What 
the agricultural improvements since made have really done 
is, by increasing the capacity of production of land in 
general, to enable tillage to extend downwards to a much 
worse natural quality of land than the worst which at that 
time would have admitted of cultivation by a capitalist for 
profit ; thus rendering a much greater increase of capital 
and population possible, and removing always a little and 
a little further off, the barrier which restrains them ; popu- 
lation meanwhile always pressing so hard against the 
barrier, that there is never any visible margin left for it to 
seize, every inch of ground made vacant for it by improve- 
ment being at once filled up by its advancing columns. 
Agricultural improvement may thus be considered to be 
not so much a counterforce conflicting with increase of 
population, as a partial relaxation of the bonds which con- 
fine that increase. 

The effects produced on the division of the produce by 
an increase of production, under the joint influence of in- 
crease of population and capital and improvements of agri- 
culture, are very different from those deduced from the 
hypothetical cases previously discussed. In particular, the 
effect on rent is most materially different, We remarked 
that — while a great agricultural improvement made sud- 
denly and universally would in the first instance inevitably 
59 



306 B00K iv. CHAPTER in. §6. 

lower rent — such improvements enable rent, in the prog- 
ress of society, to rise gradually to a much higher limit 
than it could otherwise attain, since they enable a much 
lower quality of land to be ultimately cultivated. But in 
the case we are now supposing, which nearly corresponds 
to the usual course of things, this ultimate effect becomes 
the immediate effect. Suppose cultivation to have reached, 
or almost reached, the utmost limit permitted by the state 
of the industrial arts, and rent, therefore, to have attained 
nearly the highest point to which it can be carried by the 
progress of population and capital, with the existing amount 
of skill and knowledge. If a great agricultural improve- 
ment were suddenly introduced, it might throw back rent 
for a considerable space, leaving it to regain its lost ground 
by the progress of population and capital, and afterwards 
to go on further. But, taking place, as such improvement 
always does, very gradually, it causes no retrograde move- 
ment of either rent or cultivation ; it merely enables the one 
to go on rising, and the other extending, long after they 
must otherwise have stopped. It would do this even with- 
out the necessity of resorting to a worse quality of land ; 
simply by enabling the lands already in cultivation to yield 
a greater produce, with no increase of the proportional cost. 
If by improvements of agriculture all the lands in cultiva- 
tion could be made, even with double labour and capital, 
to yield a double produce, (supposing that in the meantime 
population increased so as to require this double quantity,) 
all rents would be doubled. 

To illustrate the point, let us revert to the numerical 
example in a former page. Three qualities of land yield 
respectively 100, 80, and 60 bushels to the same outlay on 
the same extent of surface. If No. 1 could be made to yield 
200, No. 2, 160, and No. 3, 120 bushels, at only double the 
expense, and therefore without any increase of the cost of 
production, and if the population, having doubled, required 
all this increased quantity, the rent of No. 1 would be 80 
bushels instead of 40, and of No. 2, 40 instead of 20, while 






INFLUENCE OF PROGRESS ON RENTS, PROFITS, ETC. 307 

the price and value per bushel would be the same as before : 
so that corn rent and money rent would both be doubled. 
I need not point out the difference between this result, and 
what we have shown would take place if there were an im- 
provement in production without the accompaniment of an 
increased demand for food. 

Agricultural improvement, then, is always ultimately, 
and in the manner in which it generally takes place also 
immediately, beneficial to the landlord. We may add, that 
when it takes place in that manner, it is beneficial to no one 
else. When the demand for produce fully keeps pace with 
the increased capacity of production, food is not cheapened ; 
the labourers are not, even temporarily, benefited ; the cost 
of labour is not diminished, nor profits raised. There is a 
greater aggregate production, a greater produce divided 
among the labourers, and a larger gross profit ; but the 
wages being shared among a larger population, and the 
profit spread over a larger capital, no labourer is better off, 
nor does any capitalist derive from the same amount of 
capital a larger income. 

The result of this long investigation may be summed up 
as follows. The economical progress of a society constituted 
of landlords, capitalists, and labourers, tends to the pro- 
gressive enrichment of the landlord class ; while the cost of 
the labourer's subsistence tends on the whole to increase, 
and profits to fall. Agricultural improvements are a coun- 
teracting force to the two last effects; but the first, though 
a case is conceivable in which it would be temporarily 
checked, is ultimately in a high degree promoted by those 
improvements ; and the increase of population tends to 
transfer all the benefits derived from agricultural improve- 
ment to the landlords alone. What other consequences, in 
addition to these, or in modification of them, arise from the 
industrial progress of a society thus constituted, I shall 
endeavour to show in the succeeding chapter. 



CHAPTEE IV. 

OF THE TENDENCY OF PEOFITS TO A MINIMUM. 

§ 1. The tendency of profits to fall as society advances, 
which has been brought to notice in the preceding chapter, 
was early recognised by writers on industry and commerce ; 
but the laws which govern profits not being then understood, 
the phenomenon was ascribed to a wrong cause. Adam 
Smith considered profits to be determined by what he called 
the competition of capital ; and concluded that when capital 
increased, this competition must likewise increase, and 
profits must fall. It is not quite certain what sort of com 
petition Adam Smith had here in view. His words in the 
chapter on Profits of Stock* are, " When the stocks of 
many rich merchants are turned into the same trade, their 
mutual competition naturally tends to lower its profits ; and 
when there is a like increase of stock in all the different 
trades carried on in the same society, the same competition 
must produce the same effect in them all." This passage 
would lead us to infer that, in Adam Smith's opinion, the 
manner in which the competition of capital lowers profits is 
by lowering prices ; that being usually the mode in which 
an increased investment of capital in any particular trade, 
lowers the profits of that trade. But if this was his mean- 
ing, he overlooked the circumstance, that the fall of price 
which if confined to one commodity really does lower the 
profits of the producer, ceases to have that effect as soon as 
it extends to all commodities ; because, when all things 

* Wealth of Natio?is, book i. chap. 9. 






TENDENCY OF PROFITS TO A MINIMUM. 309 

have fallen, nothing has really fallen, except nominally ; 
and even computed in money, the expenses of every pro- 
ducer have diminished as much as his returns. Unless 
indeed labour be the one commodity which has not fallen 
in money price, when all other things have : if so, what has 
really taken place is a rise of wages ; and it is that, and not 
the fall of prices, which has lowered the profits of capital. 
There is another thing which escaped the notice of Adam 
Smith ; that the supposed universal fall of prices, through 
increased competition of capitals, is a thing which cannot 
take place. Prices are not determined by the competition 
of the sellers only, but also by that of the buyers ; by de- 
mand as well as supply. The demand which affects money 
prices consists of all the money in the hands of the commu- 
nity destined to be laid out in commodities ; and as long as 
the proportion of this to the commodities is not diminished, 
there is no fall of general prices. Now, howsoever capital 
may increase, and give rise to an increased production of 
commodities, a full share of the capital will be drawn to 
the business of producing or importing money, and the 
quantity of money will be augmented in an equal ratio 
with the quantity of commodities. For if this were not the 
case, and if money, therefore, were, as the theory supposes, 
perpetually acquiring increased purchasing power, those 
who produced or imported it would obtain constantly 
increasing profits ; and this could not happen without at- 
tracting labour and capital to that occupation from other 
employments. If a general fall of prices, and increased 
value of money, were really to occur, it could only be as 
a consequence of increased cost of production, from the 
gradual exhaustion of the mines. 

It is not tenable, therefore, in theory, that the increase 
of capital produces, or tends to produce, a general decline 
of money prices. Neither is it true, that any general 
decline of prices, as capital increased, has manifested itself 
in fact. The only things observed to fall in price with the 
progress of society, are those in which there have been 



310 BOOK IV. CHAPTER IV. §2. 

improvements in production, greater than have taken place 
in the production of the precious metals ; as for example, 
all spun and woven fabrics. Other things again, instead 
of falling, have risen in price, because their cost of produc- 
tion, compared with that of gold and silver, has increased. 
Among these are all kinds of food, comparison being made 
with a much earlier period of history. The doctrine, there- 
fore, that competition of capital lowers profits by lowering 
prices, is incorrect in fact, as well as unsound in principle. 

But it is not certain that Adam Smith really held that 
doctrine ; for his language on the subject is wavering and 
unsteady, denoting the absence of a definite and well-digest- 
ed opinion. Occasionally he seems to think that the mode 
in which the competition of capital lowers profits, is by 
raising wages. And when speaking of the rate of profit in 
new colonies, he seems on the very verge of grasping the 
complete theory of the subject. " As the colony increases, 
the profits of stock gradually diminish. When the most 
fertile and best situated lands have been all occupied, less 
profit can be made by the cultivation of what is inferior 
both in soil and situation." Had Adam Smith meditated 
longer on the subject, and systematized his view of it by 
harmonizing with each other the various glimpses which 
he caught of it from different points, he would have per- 
ceived that this last is the true cause of the fall of profits 
usually consequent upon increase of capital. 






§ 2. Mr. Wakefield, in his Commentary on Adam 
Smith, and his important writings on Colonization, takes a 
much clearer view of the subject, and arrives, through a sub- 
stantially correct series of deductions, at practical conclu- 
sions which appear to me just and important ; but he is not 
equally happy in incorporating his valuable speculations 
with the results of previous thought, and' reconciling them 
with other truths. Some of the theories of Dr. Chalmers, 
in his chapter " On the Increase and Limits of Capital, " and 
the two chapters which follow it, coincide in their tendency 






TENDENCY OF PROFITS TO A MINIMUM. 31 J 

and spirit with those of Mr. Wakefield ; but Dr. Chalmers' 
ideas, though delivered, as is his custom, with a most at- 
tractive semblance of clearness, are really on this subject 
much more confused than even those of Adam Smith, and 
more decidedly infected with the often refuted notion that 
the competition of capital lowers general prices ; the subject 
of Money apparently not having been iucluded among the 
parts of Political Economy which this acute and vigorous 
writer had carefully studied. 

Mr. Wakefield's explanation of the fall of profits is 
briefly this. Production is limited not solely by the quantity 
of capital and of labour, but also by the extent of the " field 
of employment." The field of employment for capital is 
twofold ; the land of the country, and the capacity of foreign 
markets to take its manufactured commodities. On a 
limited extent of land, only a limited quantity of capital 
can find employment at a profit. As the quantity of capi- 
tal approaches this limit, profit falls ; when the limit is 
attained, profit is annihilated; and can only be restored 
through an extension of the field of employment, either by 
the acquisition of fertile land, or by opening new markets 
in foreign countries, from which food and materials can be 
purchased with the products of domestic capital. These 
propositions are in my opinion substantially true; and, 
even to the phraseology in which they are expressed, con- 
sidered as adapted to popular and practical rather than 
scientific uses, I have nothing to object. The error which 
seems to me imputable to Mr. Wakefield is that of suppos- 
ing his doctrines to be in contradiction to the principles of 
the best school of preceding political economists, instead of 
being, as they really are, corollaries from those principles ; 
though corollaries which, perhaps, would not always have 
been admitted by those political economists themselves. 

The most scientific treatment of the subject which I 
have met with, is in an essay on the effects of Machinery, 
published in the Westminster fieview for January 1826, by 



312 BOOK IV. CHAPTER IV. § 3. 

Mr. William Ellis ;* which was doubtless -unknown to Mr. 
Wakefield, but which had preceded him, though by a differ- 
ent path, in several of his leading conclusions. This essay 
excited little notice, partly from being published anony- 
mously in a periodical, and partly because it was much in 
advance of the state of political economy at the time. In 
Mr. Ellis's view of the subject, the questions and difficulties 
raised by Mr. Wakefield's speculations and by those of Dr. 
Chalmers, find a solution consistent with the principles of 
political economy laid down in the present treatise. 

§ 3. There is at every time and place some particular 
rate of profit, which is the lowest that will induce the 
people of that country and time to accumulate savings, and 
to employ those savings productively. This minimum rate 
of profit varies according to circumstances. It depends on 
two elements. One is, the strength of the effective desire 
of accumulation ; the comparative estimate made by the 
people of that place and era, of future interests when 
weighed against present. This element chiefly affects the 
inclination to save. The other element, which affects not 
so much the willingness to save as the disposition to employ 
savings productively, is the degree of security of capital 
engaged in industrial operations. A state of general inse- 
curity, no doubt affects also the disposition to save. A 
hoard may be a source of additional danger to its reputed 
possessor. But as it may also be a powerful means of avert- 
ing dangers, the effects in this respect may perhaps be 
looked upon as balanced. But in employing any funds 
which a person may possess as capital on his own account, 
or in lending it to others to be so employed, there is always 
some additional risk, over and above that incurred by keep- 
ing it idle in his own custody. This extra risk is great in 



* Now so much better known by his apostolic exertions, in pen, purse, and 
person, for the improvement of popular education, and especially for the intro- 
duction into it of the elements of practical Political Economy. 



TENDENCY OF PROFITS TO A MINIMUM. 313 

proportion as the general state of society is insecure : it may 
be equivalent to twenty, thirty, or fifty per cent, or to no 
more than one or two ; something, however, it must always 
be : and for this, the expectation of profit must be sufficient 
to compensate. 

There would be adequate motives for a certain amount 
of saving, even if capital yielded no profit. There would be 
an inducement to lay by in good times a provision for bad ; 
to reserve something for sickness and infirmity, or as a 
means of leisure and independence in the latter part of life, 
or a help to children in the outset of it. Savings, however, 
which have only these ends in view, have not much tend- 
ency to increase the amount of capital permanently in exist- 
ence. These motives only prompt persons to save at one 
period of life what they purpose to consume at another, or 
what will be consumed by their children before they can 
completely provide for themselves. The savings by which 
an addition is made to the national capital, usually emanate 
from the desire of persons to improve what is termed their 
condition in life, or to make a provision for children or 
others, independent of their exertions. Now, to the strength 
of these inclinations it makes a very material difference how 
much of the desired object can be effected by a given 
amount and duration of self-denial ; which again depends on 
the rate of profit. And there is in every country some rate 
of profit, below which persons in general will not find 
sufficient motive to save for the mere purpose of growing 
richer, or of leaving others better off than themselves. 
Any accumulation, therefore, by which the general capital 
is increased, requires as its necessary condition a certain 
rate of profit : a rate which an average person will deem to 
be an equivalent for abstinence, with the addition of a 
sufficient insurance against risk. There are always some 
persons in whom the effective desire of accumulation is above 
the average, and to whom less than this rate of profit is a 
sufficient inducement to save ; but these merely step into 
the place of others whose taste for expense and indulgence 



314 BOOK IV. CHAPTER IV. §3. 

is beyond the average, and who, instead of saving, perhaps 
even dissipate what they have received. 

I have already observed that this minimum rate of 
profit, less than which is not consistent with the further 
increase of capital, is lower in some states of society than in 
others ; and I may add, that the kind of social progress 
characteristic of our present civilization, tends to diminish 
it. In the first place, one of the acknowledged effects of 
that progress is an increase of general security. Destruc- 
tion by wars, and spoliation by private or public violence, 
are less and less to be apprehended ; and the improvements 
which may be looked for in education and in the adminis- 
tration of justice, or, in their default, increased regard for 
opinion, afford a growing protection against fraud and 
reckless mismanagement. The risks attending the invest- 
ment of savings in productive employment, require 
therefore a smaller rate of profit to compensate for them 
than was required a century ago, and will hereafter require 
less than at present. In the second place, it is also one of 
the consequences of civilization that mankind become less 
the slaves of the moment, and more habituated to carry 
their desires and purposes forward into a distant future. 
This increase of providence is a natural result of the in- 
creased assurance with which futurity can be looked for- 
ward to ; and is, besides, favoured by most of the influences 
which an industrial life exercises over the passions and incli- 
nations of human nature. In proportion as life has fewer 
vicissitudes, as habits become more fixed, and great prizes 
are less and less to be hoped for by any other means than 
long perseverance, mankind become more willing to sacrifice 
present indulgence for future objects. This increased capa- 
city of forethought and self-control may assuredly find other 
things to exercise itself upon than increase of riches, and 
some considerations connected with this topic will shortly 
be touched upon. The present kind of social progress, how- 
ever, decidedly tends, though not perhaps to increase the 
desire of accumulation, yet to weaken the obstacles to it, 



TENDENCY OF PROFITS TO A MINIMUM. 3^5 

and to diminish the amount of profit which people abso- 
lutely require as an inducement to save and accumulate. For 
these two reasons, diminution of risk and increase of provi- 
dence, a profit or interest of three or four per cent is as 
sufficient a motive to the increase of capital in England at 
the present day, as thirty or forty per cent in the Burmese 
Empire, or in England at the time of King John. In Hol- 
land during the last century a return of two per cent, on 
government security, was consistent with an undiminished, 
if not with an increasing capital. But though the mini- 
mum rate of profit is thus liable to vary, and though to 
specify exactly what it is would at any given time be im- 
possible, such a minimum always exists ; and whether it be 
high or low, when once it is reached, no further increase of 
capital can for the present take place. The country has 
then attained what is known to political economists under 
the name of the stationary state. 

§ 4. We now arrive at the fundamental proposition 
which this chapter is intended to inculcate. "When a 
country has long possessed a large production, and a large 
net income to make savings from, and when, therefore, the 
means have long existed of making a great annual addition 
to capital ; (the country not having, like America, a large 
reserve of fertile land still unused ;) it is one of the character- 
istics of such a country, that the rate of profit is habitually 
within, as it were, a hand's breadth of the minimum, and 
the country therefore on the very verge of the stationary 
state. By this I do not mean that this state is likely, in 
any of the great countries of Europe, to be soon actually 
reached, or that capital does not still yield a profit con- 
siderably greater than what is barely sufficient to induce 
the people of those countries to save and accumulate. My 
meaning is, that it would require but a short time to reduce 
profits to the minimum, if capital continued to increase at 
its present rate, and no circumstances having a tendency 
to raise the rate of profit occurred in the meantime. The ex- 



316 BOOK IV. CHAPTER IV. §4. 

pansion of capital would soon reach its ultimate boundary, 
if the boundary itself did not continually open and leave 
more space. 

In England, the ordinary rate of interest on government 
securities, in which the risk is next to nothing, may be esti- 
mated at a little more than three per cent : in all other in- 
vestments, therefore, the interest or profit calculated upon 
(exclusively of what is properly a remuneration for talent 
or exertion) must be as much more than this amount, as is 
equivalent to the degree of risk to which the capital is 
thought to be exposed. Let us suppose that in England 
even so small a net profit as one per cent, exclusive of insur- 
ance against risk, would constitute a sufficient inducement 
to save, but that less than this would not be a sufficient 
inducement. I now say, that the mere continuance of the 
present annual increase of capital, if no circumstance occur- 
red to counteract its effect, would suffice in a small number 
of years to reduce the rate of net profit to one per cent. 

To fulfil the conditions of the hypothesis, we must sup- 
pose an entire cessation of the exportation of capital for 
foreign investment. No more capital sent . abroad for rail- 
ways, or loans ; no more emigrants taking capital with them, 
to the colonies, or to other countries ; no fresh advances 
made, or credits given, by bankers or merchants* to their 
foreign correspondents. We must also assume that there 
are no fresh loans, for unproductive expenditure by the 
government, or on mortgage, or otherwise ; and none of the 
waste of capital which- now takes place by the failure of 
undertakings which people are tempted to engage in by the 
hope of a better income than can be obtained in safe paths 
at the present habitually low rate of profit. We must sup- 
pose the entire savings of the community to be annually 
invested in really productive employment within the coun- 
try itself; and no new channels opened by industrial inven- 
tions, or by a more extensive substitution of the best known 
processes for inferior ones. 

Few persons would hesitate to say, that there would be 



TENDENCY OF PROFITS TO A MINIMUM. Sll 

great difficulty in finding remunerative employment every 
year for so much new capital, and most would conclude that 
there would be what used to be termed a general glut ; that 
commodities would be produced, and remain unsold, or be 
sold only at a loss. But the full examination which we 
have already given to this question,* has shown that this is 
not the mode in which the inconvenience would be experi- 
enced. The difficulty would not consist in any want of a 
market. If the new capital were duly shared among many 
varieties of employment, it would raise up a demand for its 
own produce, and there would be no cause why any part 
of that produce should remain longer on hand than for- 
merly. What would really be, not merely difficult, but 
impossible, would be to employ this capital without sub- 
mitting to a rapid reduction of the rate of profit. 

As capital increased, population either would also in- 
crease, or it would not. If it did not, wages would rise, 
and a greater capital would be distributed in wages among 
the same number of labourers. There being no more labour 
than before, and no improvements to render the labour 
more efficient, there would not be any increase of the prod- 
uce ; and as the capital, however largely increased, would 
only obtain the same gross return, the whole savings of 
each year would be exactly so much subtracted from the 
profits of the next and of every following year. It is hardly 
necessary to say that in such circumstances profits would 
very soon fall to the point at which further increase of cap- 
ital would cease. An augmentation of capital, much more 
rapid than that of population, must soon reach its extreme 
limit, unless accompanied by increased efficiency of labour 
(through inventions and discoveries, or improved mental 
and physical education), or unless some of the idle people, 
or of the unproductive labourers, became productive. 

If population did increase with the increase of capital 
and in proportion to it, the fall of profits would still be 
inevitable. Increased population implies increased demand 

* Book iii. chap. 14. 



318 BOOK IV. CHAPTER IV. §5. 

for agricultural produce. In the absence of industrial im- 
provements, this demand can only be supplied at an in- 
creased cost of production, either by cultivating worse land, 
or by a more elaborate and costly cultivation of the land 
already under tillage. The cost of the labourer's subsistence 
is therefore increased ; and unless the labourer submits to a 
deterioration of his condition, profits must fall. In an old 
country like England, if, in addition to supposing all im- 
provement in domestic agriculture suspended, we suppose 
that there is no increased production in foreign countries for 
the English market, the fall of profits would be very rapid. 
If both these avenues to an increased supply of food were 
closed, and population continued to increase, as it is said to 
do, at the rate of a thousand a day, all waste land which 
admits of cultivation in the existing state of knowledge 
would soon be cultivated, and the cost of production and 
price of food would be so increased, that, if the labourers 
received the increased money wages necessary to compen- 
sate for their increased expenses, profits would very soon 
reach the minimum. The fall of profits would be retard- 
ed if money wages did not rise, or rose in a less degree ; 
but the margin which can be gained by a deterioration of 
the labourer's condition is a very narrow one : in general 
they cannot bear much reduction ; when they can, they 
have also a higher standard of necessary requirements, and 
will not. On the whole, therefore, we may assume that in 
such a country as England, if the present annual amount of 
savings were to continue, without any of the counteracting 
circumstances which now keep in check the natural influ- 
ence of those savings in reducing profit, the rate of profit 
would speedily attain the minimum, and all further accu- 
mulation of capital would for the present cease. 

§ 5. "What, then, are these counteracting circumstances, 
which, in the existing state of things, maintain a tolerably 
equal struggle against the downward tendency of profits, 
and prevent the great annual savings which take place in 



TENDENCY OF PROFITS TO A MINIMUM. 319 

this country, from depressing the rate of profit much nearer 
to that lowest point to which it is always tending, and which, 
left to itself, it would so promptly attain ? The resisting 
agencies are of several kinds. 

First among them, we may notice one which is so 
simple and so conspicuous, that some political economists, 
especially M. de Sismondi and Dr. Chalmers, have attend- 
ed to it almost to the exclusion of all others. This is, the 
waste of capital in periods of over-trading and rash specu- 
lation, and in the commercial revulsions by which such 
times are always followed. It is true that a great part 
of what is lost at such periods is not destroyed, but merely 
transferred, like a gambler's losses, to more successful specu- 
lators. But even of these mere transfers, a large portion is 
always to foreigners, by the hasty purchase of unusual 
quantities of foreign goods at advanced prices. And much 
also is absolutely wasted. Mines are opened, railways or 
bridges made, and many other works of uncertain profit 
commenced, and in these enterprises much capital is sunk 
which yields either no return, or none adequate to the out- 
lay. Factories are built and machinery erected beyond 
what the market requires, or can keep in employment. 
Even if they are kept in employment, the capital is no less 
sunk ; it has been converted from circulating into fixed 
capital, and has ceased to have any influence on wages or 
profits. Besides this, there is a great unproductive con- 
sumption of capital, during the stagnation which follows a 
period of general over-trading. Establishments are shut 
up, or kept working without any profit, hands are dis- 
charged, and numbers of persons in all ranks, being de- 
prived of their income, and thrown for support on their 
savings, find themselves, after the crisis has passed away, 
in a condition of more or less impoverishment. Such are 
the effects of a commercial revulsion : and that such revul- 
sions are almost periodical, is a consequence of the very 
tendency of profits which we are considering. By the time 
a few years have passed over without a crisis, so much 



320 BOO K IV - CHAPTER IV. §6. 

additional capital has been accumulated, that it is no longei 
possible to invest it at the accustomed profit : all public 
securities rise to a high price, the rate of interest on the 
best mercantile security falls very low, and the complaint 
is general among persons in business that no money is to 
be made. Does not this demonstrate how speedily profit 
would be at the minimum, and the stationary condition of 
capital would be attained, if these accumulations went on 
without any counteracting principle ? But the diminished 
scale of all safe gains, inclines persons to give a ready ear to 
any projects which hold out, though at the risk of loss, the 
hope of a higher rate of profit ; and speculations ensue, 
which, with the subsequent revulsions, destroy, or transfer 
to foreigners, a considerable amount of capital, produce a 
temporary rise of interest and profit, make room for fresh 
accumulations, and the same round is recommenced. 

This, doubtless, is one considerable cause which arrests 
profits in their descent to the minimum, by sweeping away 
from time to time a part of the accumulated mass by which 
they are forced down. But this is not, as might be inferred 
from the language of some writers, the principal cause. If 
it were, the capital of the country would not increase ; but 
in England it does increase greatly and rapidly. This is 
shown by the increasing productiveness of almost all taxes, 
by the continual growth of all the signs of national wealth, 
and by the rapid increase of population, while the condition 
of the labourers certainly is not on the whole declining. 
These things prove that each commercial revulsion, how- 
ever disastrous, is very far from destroying all the capital 
which has been added to the accumulations of the country 
since the last revulsion preceding it, and that, invariably, 
room is either found or made for the profitable employment 
of a perpetually increasing capital, consistently with not 
forcing down profits to a lower rate. 

§ 6. This brings us to the second of the counter-agen- 
cies, namely, improvements in production. These evidently 



TENDENCY OF PROFITS TO A MINIMUM. 321 

have the effect of extending what Mr. "Wakefield terms the 
field of employment, that is, they enable a greater amount 
of capital to be accumulated and employed without depress- 
ing the rate of profit : provided always that they do not 
raise, to a proportional extent, the habits and requirements 
of the labourer. If the labouring class gain the full advan- 
tage of the increased cheapness, in other words, if money 
wages do not fall, profits are not raised, nor their fall re- 
tarded. But if the labourers people up to the improvement 
in their condition, and so relapse to their previous state, 
profits will rise. All inventions which cheapen any of the 
things consumed by the labourers, unless their requirements 
are raised in an equivalent degree, in time lower money 
wages: and by doing so, enable a greater capital to be 
accumulated and employed, before profits fall back to what 
they were previously. 

Improvements which only affect things consumed exclu- 
sively by the richer classes, do not operate precisely in the 
same manner. The cheapening of lace or velvet has no 
effect in diminishing the cost of labour ; and no mode can 
be pointed out in which it can raise the rate of profit, so as 
to make room for a larger capital before the minimum is 
attained. It, however, produces an effect which is virtually 
equivalent ; it lowers, or tends to lower, the minimum itself. 
In the first place, increased cheapness of articles of con- 
sumption promotes the inclination to save, by affording to 
all consumers a surplus which they may lay by, consist- 
ently with their accustomed manner of living ; and unless 
they were previously suffering actual hardships, it will 
require little self-denial to save some part at least of this 
surplus. In the next place, whatever enables people to live 
equally well on a smaller income, inclines them to lay by 
capital for a lower rate of profit. If people can live on an 
independence of 500Z. a year in the same manner as they 
formerly could on one of 1000/., some persons will be in- 
duced to save in hopes of the one, who would have been 
deterred by the more remote prospect of the other. All 
GO 



322 BOOK IV. CHAPTER IV. §7. 

improvements, therefore, in the production of almost any 
commodity, tend in some degree to widen the interval which 
has to be passed before arriving at the stationary state : 
but this effect belongs in a much greater degree to the im- 
provements which affect the articles consumed by the la- 
bourer, since these conduce to it in two ways ; they induce 
people to accumulate for a lower profit, and they also raise 
the rate of profit itself. 

§ 7. Equivalent in effect to improvements in production, 
is the acquisition of any new power of obtaining cheap com- 
modities from foreign countries. If necessaries are cheap- 
ened, whether they are so by improvements at home or im- 
portation from abroad, is exactly the same thing to wages 
and profits. Unless the labourer obtains, and by an im- 
provement of his habitual standard, keeps, the whole benefit, 
the cost of labour is lowered, and the rate of profit raised. 
As long as food can continue to be imported for an increas- 
ing population without any diminution of cheapness, so long 
the declension of profits through the increase of population 
and capital is arrested, and accumulation may go on with- 
out making the rate of profit draw nearer to the minimum. 
And on this ground it is believed by some, that the repeal 
of the corn laws has opened to this country a long era of 
rapid increase of capital with an undiminished rate of 
profit. 

Before inquiring whether this expectation is reasonable, 
one remark must be made, which is much at variance with 
commonly received notions. Foreign trade does not neces- 
sarily increase the field of employment for capital. It is 
not the mere opening of a market for a country's produc- 
tions, that tends to raise the rate of profits. If nothing 
were obtained in exchange for those productions but the 
luxuries of the rich, the expenses of no capitalist would be 
diminished ; profits would not be at all raised, nor room 
made for the accumulation of more capital without submit- 
ting to a reduction of profits : and if the attainment of the 



TENDENCY OF PROFITS TO A MINIMUM. 323 

stationary state were at all retarded, it would only be 
because the diminished cost at which a certain degree of 
luxury could be enjoyed, might induce people, in that pros- 
pect, to make fresh savings for a lower profit than they for- 
merly were willing to do. When foreign trade makes room 
for more capital at the same profit, it is by enabling the 
necessaries of life, or the habitual articles of the labourer's 
consumption, to be obtained at smaller cost. It may do 
this in two ways ; by the importation either of those com- 
modities themselves, or of the means and appliances for 
producing them. Cheap iron has, in a certain measure, the 
same effect on profits and the cost of labour as cheap corn, 
because cheap iron makes cheap tools for agriculture and 
cheap machinery for clothing. But a foreign trade which 
neither directly, nor by any indirect consequence, increases 
the cheapness of anything consumed by the labourers, does 
not, any more than an invention or discovery in the like 
case, tend to raise profits or retard their fall ; it merely 
substitutes the production of goods for foreign markets, in 
the room of the home production of luxuries, leaving the 
employment for capital neither greater nor less than before. 
It is true, that there is scarcely any export trade which, in 
a country that already imports necessaries or materials, 
comes within these conditions : for every increase of exports 
enables the country to obtain all its imports on cheaper 
terms than before. 

A country which, as is now the case with England, 
admits food of all kinds, and all necessaries and the mate- 
rials of necessaries, to be freely imported from all parts of 
the world, no longer depends on the fertility of her own 
soil to keep up her rate of profits, but on the soil of the 
whole world. It remains to consider how far this resource 
can be counted upon for making head during a very long 
period against the tendency of profits to decline as capital 
increases. 

It must, of course, be supposed that with the increase of 
capital, population also increases ; for if it did not, the con- 



324 B00K IV - CHAPTER IV. §8. 

sequent rise of wages would bring down profits, in spite of 
any cheapness of food. Suppose then that the population 
of Great Britain goes on increasing at its present rate, and 
demands every year a supply of imported food considerably 
beyond that of the year preceding. This annual increase in 
the food demanded from the exporting countries, can only 
be obtained either by great improvements in their agri- 
culture, or by the application of a great additional capital to 
the growth of food. The former is likely to be a very slow 
process, from the rudeness and ignorance of the agricultural 
classes in the food-exporting countries of Europe, while the 
British colonies and the United States are already in pos- 
session of most of the improvements yet made, so far as 
suitable to their circumstances. There remains as a re- 
source, the extension of cultivation. And on this it is to be 
remarked, that the capital by which any such extension can 
take place, is mostly still to be created. In Poland, Eussia, 
Hungary, Spain, the increase of capital is extremely slow. 
In America it is rapid, but not more rapid than the popula- 
tion. The principal fund at present available for supplying 
this country with a yearly increasing importation of food, is 
that portion of the annual savings of America which has 
heretofore been applied to increasing the manufacturing 
establishments of the United States, and which free trade in 
corn may possibly divert from that purpose to growing food 
for our market. This limited source of supply, unless great 
improvements take place in agriculture, cannot be expected 
to keep pace with the growing demand of so rapidly in- 
creasing a population as that of Great Britain ; and if our 
population and capital continue to increase with their pres- 
ent rapidity, the only mode in which food can continue to 
be supplied cheaply to the one, is by sending the other 
abroad to produce it. 

§ 8. This brings us to the last of the counter-forces 
which check the downward tendency of profits in a country 
whose capital increases faster than that of its neighbours, and 



TENDENCY OF PROFITS TO A MINIMUM. 325 

whose profits are therefore nearer to the minimum. This 
is, the perpetual overflow of capital into colonies or foreign 
countries, to seek higher profits than can be obtained at 
home. I believe this to have been for many years one of 
the principal causes by which the decline of profits in Eng- 
land has been arrested. It has a twofold operation. In the 
first place, it does what a fire, or an inundation, or a com- 
mercial crisis would have done : it carries off a part of the 
increase of capital from which the reduction of profits pro- 
ceeds. Secondly, the capital so carried off is not lost, but 
is chiefly employed either in founding colonies, which be- 
come large exporters of cheap agricultural produce, or in 
extending and perhaps improving the agriculture of older 
communities. It is to the emigration of English capital, 
that we have chiefly to look for keeping up a supply of 
cheap food and cheap materials of clothing, proportional to 
the increase of our population : thus enabling an increasing 
capital to find employment in the country, without reduc- 
tion of profit, in producing manufactured articles with which 
to pay for this supph r of raw produce. Thus, the exporta- 
tion of capital is an agent of great efficacy in extending the 
field of employment for that which remains : and it may be 
said truly that, up to a certain point, the more capital we 
send away, the more we shall possess and be able to retain 
at home. 

In countries which are further advanced in industry and 
population, and have therefore a lower rate of profit, than 
others, there is always, long before the actual minimum ia 
reached, a practical minimum, viz. when profits have fallen 
so much below what they are elsewhere, that, were they to 
fall lower, all further accumulations would go abroad. In 
the present state of the industry of the world, when there is 
occasion, in any rich and improving country, to take the 
minimum of profits at all into consideration for practical 
purposes, it is only this practical minimum that needs be 
considered. As long as there are old countries where capi- 
tal increases very rapidly, and new countries where profit 



326 B00K rV- CHAPTER IV. §8. 

is still high, profits in the old countries will not sink to the 
rate which would put a stop to accumulation ; the fall is 
stopped at the point which sends capital abroad. It is only, 
however, by improvements in production, and even in the 
production of things consumed by labourers, that the capital 
of a country like England is prevented from speedily 
reaching that degree of lowness of profit, which would 
cause all further savings to be sent to find employment in 
the colonies, or in foreign countries. 



CHAPTER V. 

CONSEQUENCES OF THE TENDENCY OF PROFITS TO 
A MINIMUM. 

§ 1. The theory of the effect of accumulation on profi 
its, laid down in the preceding chapter, materially alters 
many of the practical conclusions which might otherwise be 
supposed to follow from the general principles of Political 
Economy, and which were, indeed, long admitted as true 
by the highest authorities on the subject. 

It must greatly abate, or rather, altogether destroy, in 
countries where profits are low, the immense importance 
which used to be attached by political economists to the 
effects which an event or a measure of government might 
have in adding to or subtracting from the capital of the 
country. We have now seen that the lowness of profits is a 
proof that the spirit of accumulation is so active, and that 
the increase of capital has proceeded at so rapid a rate, as 
to outstrip the two counter-agencies, improvements in pro- 
duction, and increased supply of cheap necessaries from 
abroad : and that unless a considerable portion of the 
annual increase of capital were either periodically de- 
stroyed, or exported for foreign investment, the country 
would speedily attain the point at which further accumula- 
tion would cease, or at least spontaneously slacken, so as no 
longer to overpass the march of invention in the arts which 
produce the necessaries of life. In such a state of things 
as this, a sudden addition to the capital of the country, 



328 BOOK IV. CHAPTER V. §1. 

■unaccompanied by any increase of productive power, would 
be but of transitory duration ; since by depressing profits 
and interest, it would either diminish by a corresponding 
amount the savings which would be made from income in 
the year or two following, or it would cause an equivalent 
amount to be sent abroad, or to be wasted in rash specula- 
tions. Neither, on the other hand, would a sudden abstrac- 
tion of capital, unless of inordinate amount, have any real 
effect in impoverishing the country. After a few months 
or years, there would exist in the country just as much cap- 
ital as if none had been taken away. The abstraction, by 
raising profits and interest, would give a fresh stimulus to 
the accumulative principle, which would speedily fill up the 
vacuum. Probably, indeed, the only effect that would 
ensue, would be that for some time afterwards less capital 
would be exported, and less thrown away in hazardous 
speculation. 

In the first place, then, this view of things greatly weak- 
ens, in a wealthy and industrious country, the force of the 
economical argument against the expenditure of public 
money for really valuable, even though industriously unpro- 
ductive, purposes. If for any great object of justice or 
philanthropic policy, such as the industrial regeneration of 
Ireland, or a comprehensive measure of colonization or of 
public education, it were proposed to raise a large sum by 
way of loan, politicians need not demur to the abstraction 
of so much capital, as tending to dry up the permanent 
sources of the country's wealth, and diminish the fund 
which supplies the subsistence of the labouring population. 
The utmost expense which could be requisite for any of 
these purposes, would not in all probability deprive one 
labourer of employment, or diminish the next year's pro- 
duction by one ell of cloth or one bushel of grain. In poor 
countries, the capital of the country requires the legislator's 
sedulous care ; he is bound to be most cautions of encroach- 
ing upon it, and should favour to the utmost its accumulation 
at home, and its introduction from abroad. But in rich, 



TENDENCY OF PROFITS TO A MINIMUM. 329 

populous, and highly cultivated countries, it is not capital 
which is the deficient element, but fertile land ; and what 
the legislator should desire and promote, is not a greater 
aggregate saving, but a greater return to savings, either 
by improved cultivation, or by access to the produce of 
more fertile lands in other parts of the globe. In such 
countries, the government may take any moderate portion 
of the capital of the country and expend it as revenue, 
without affecting the national wealth : the whole being 
either drawn from that portion of the annual savings which 
would otherwise be sent abroad, or being subtracted from 
the unproductive expenditure of individuals for the next 
year or two, since every million spent makes room for 
another million to be saved before reaching the overflowing 
point. When the object in view is worth the sacrifice of 
such an amount of the expenditure that furnishes the daily 
enjoyments of the people, the only well-grounded economi- 
cal objection against taking the necessary funds directly 
from capital, consists of the inconveniences attending the 
process of raising a revenue by taxation, to pay the interest 
of a debt. 

The same considerations enable us to throw aside as 
unworthy of regard, one of the common arguments against 
emigration as a means of retief for the labouring class. 
Emigration, it is said, can do no good to the labourers, if, 
in order to defray the cost, as much must be taken away 
from the capital of the country as from its population. 
That anything like this proportion could require to be ab- 
stracted from capital for the purpose even of the most ex- 
tensive colonization, few, I should think, would now assert : 
but even on that untenable supposition, it is an error to 
suppose that no benefit would be conferred on the labouring 
class. If one-tenth of the labouring people of England were 
transferred to the colonies, and along with them one-tenth 
of the circulating capital of the country, either wages, or 
profits, or both, would be greatly benefited, by the dimin- 
ished pressure of capital and population upon the fertility of 



330 BOOK IV. CHAPTER V. §2. 

the land. There would be a reduced demand for food : the 
inferior arable lands would be thrown out of cultivation, 
and would become pasture ; the superior would be cul- 
tivated less highly, but with a greater proportional return ; 
food would be lowered in price, and though money wages 
would not rise, every labourer would be considerably im- 
proved in circumstances ; an improvement which, if no 
increased stimulus to population and fall of wages ensued, 
would be permanent ; while if there did, profits would rise, 
and accumulation start forward so as to repair the loss of 
capital. The landlords alone would sustain some loss of 
income ; and even they, only if colonization went to the 
length of actually diminishing capital and population, but 
not if it merely carried off the annual increase. 

§ 2. From the same principles we are now able to 
arrive at a final conclusion respecting the effects which 
machinery, and generally the sinking of capital for a pro- 
ductive purpose, produce upon the immediate and ultimate 
interests of the labouring class. The characteristic property 
of this class of industrial improvements is the conversion of 
circulating capital into fixed : and it was shown in the first 
Book,* that in a country where capital accumulates slowly, 
the introduction of machinery, permanent improvements of 
land, and the like, might be, for the time, extremely inju- 
rious ; since the capital so employed might be directly 
taken from the wages fund, the subsistence of the people 
and the employment for labour curtailed, and the gross 
annual produce of the country actually diminished. But in 
a country of great annual savings and low profits, no such 
effects need be apprehended. Since even the emigration 
of capital, or its unproductive expenditure, or its absolute 
waste, do not in such a country, if confined within any 
moderate bounds, at all diminish the aggregate amount of 
the wages fund — still less can the mere conversion of a like 
sum into fixed capital, which continues to be productive, have 

* Supra, vol. i. p. 133. 



TENDENCY OF PROFITS TO A MINIMUM. 331 

that effect. It merely draws off at one orifice what was 
already flowing out at another ; or if not, the greater vacant 
space left in the reservoir does but cause a greater quantity 
to flow in. Accordingly, in spite of the mischievous de- 
rangements of the money-market which have been occa- 
sioned by the great sums in process of being sunk in rail- 
ways, I cannot agree with those who apprehend any mis- 
chief, from this source, to the productive resources of the 
country. Not on the absurd ground (which to any one ac- 
quainted with the elements of the subject needs no confuta- 
tion) that railway expenditure is a mere transfer of capital 
from hand to hand, by which nothing is lost or destroyed. 
This is true of what is spent in the purchase of the land ; a 
portion too of what is paid to parliamentary agents, counsel, 
engineers, and surveyors, is saved by those who receive it, 
and becomes capital again : but what is laid out in the 
bond fide construction of the railway itself, is lost and gone ; 
when once expended, it is incapable of ever being paid in 
wages or applied to the maintenance of labourers again ; as 
a matter of account, the result is that so much food and 
clothing and tools have been consumed, and the country 
has got a railway instead. But what I would urge is, that 
sums so applied are mostly a mere appropriation of the an- 
nual overflowing which would otherwise have gone abroad, 
or been thrown away unprofitably, leaving neither a rail- 
way nor any other tangible result. The railway gambling 
of 1844 and 1845 probably saved the country from a de- 
pression of profits and interest, and a rise of all public and 
private securities, which would have engendered still wilder 
speculations, and when the effects came afterwards to be 
complicated by the scarcity of food, would have ended in a 
still more formidable crisis than was experienced in the 
years immediately following. In the poorer countries of 
Europe, the rage for railway construction might have had 
worse consequences than in England, were it not that in 
those countries such enterprises are in a great measure 
carried on by foreign capital. The railway operations of 



332 B00K IV - CHAPTER V. §2. 

the various nations of the world may he looked upon as 
a sort of competition for the overflowing capital of the 
countries where profit is low and capital abundant, as Eng- 
land and Holland. The English railway speculations are a 
struggle to keep our annual increase of capital at home ; 
those of foreign countries are an effort to obtain it.* 

It already appears from these considerations, that the 
conversion of circulating capital into fixed, whether by 
railways, or manufactories, or ships, or machinery, or 
canals, or mines, or works of drainage and irrigation, is not 
likely, in any rich country, to diminish the gross produce 
or the amount of employment for labour. How much then 
is the case strengthened, when we consider that these trans- 
formations of capital are of the nature of improvements in 
production, which, instead of ultimately diminishing circula- 
ting capital, are the necessary conditions of its increase, since 
they alone enable a country to possess a constantly aug- 
menting capital, without reducing profits to the rate which 
would cause accumulation to stop. There is hardly any in- 
crease of fixed capital which does not enable the country to 
contain eventually a larger circulating capital, than it other- 
wise could possess and employ within its own limits ; for 
there is hardly any creation of fixed capital which, when it 
proves successful, does not cheapen the articles on which 
wages are habitually expended. All capital sunk in the 
permanent improvement of land lessens the cost of food and 
materials ; almost all improvements in machinery cheapen 
the labourer's clothing or lodging, or the tools with which 
these are made ; improvements in locomotion, such as rail- 
ways, cheapen to the consumer all things which are brought 
from a distance. All these improvements make the labour 
ers better off with the same money wages, better off if they 
do not increase their rate of multiplication. But if they do, 

* It is hardly needful to point out how fully the remarks in the text (which 
I have left as they originally stood) have been verified by subsequent facts. The 
capital of the country, far from having been in any degree impaired by the large 
amount sunk in Tailway construction, was soon again overflowing. 



TENDENCY OF PROFITS TO A MINIMUM. 333 

and wages consequently fall, at least profits rise, and, while 
accumulation receives an immediate stimulus, room is made 
for a greater amount of capital before a sufficient motive 
arises for sending it abroad. Even the improvements which 
do not cheapen the things consumed by the labourer, and 
which, therefore, do not raise profits nor retain capital in 
the country, nevertheless, as we have seen, by lowering 
the minimum of profit for which people will ultimately con- 
sent to save, leave an ampler margin than previously for 
eventual accumulation, before arriving at the stationary 
state. 

We may conclude, then, that improvements in produc- 
tion, and emigration of capital to the more fertile soils and 
unworked mines of the uninhabited or thinly peopled parts 
of the globe, do not, as appears to a superficial view, dimin- 
ish the gross produce and the demand for labour at home, 
but, on the contrary, are what we have chiefly to depend on 
for increasing both, and are even the necessary conditions of 
any great or prolonged augmentation of either. Nor is it 
any exaggeration to say, that within certain, and not very 
narrow, limits, the more capital a country like England 
expends in these two ways, the more she will have left. 



CHAPTEK VI. 

OF THE STATIONARY STATE. 

§ 1. The preceding chapters comprise the general 
theory of the economical progress of society, in the sense 
in which those terms are commonly understood ; the prog- 
ress of capital, of population, and of the productive arts. 
But in contemplating any progressive movement, not in its 
nature unlimited, the mind is not satisfied with merely trac- 
ing the laws of the movement ; it cannot but ask the further 
question, to what goal ? Towards what ultimate point is 
society tending by its industrial progress ? "When the prog- 
ress ceases, in what condition are we to expect that it will 
leave mankind ? 

It must always have been seen, more or less distinctly, 
by political economists, that the increase of wealth is not 
boundless : that at the end of what they term the pro- 
gressive state lies the stationary state, that all progress in 
wealth is but a postponement of this, and that each step in 
advance is an approach to it. We have now been led to 
recognize that this ultimate goal is at all times near enough 
to be fully in view ; that we are always on the verge of it, 
and that if we have not reached it long ago, it is because 
the goal itself flies before us. The richest and most pros- 
perous countries would very soon attain the stationary 
state, if no further improvements were made in the pro- 
ductive arts, and if there were a suspension of the overflow 
of capital from those countries into the uncultivated or ill- 
cultivated regions of the earth. 



THE STATIONARY STATE. 335 

This impossibility of ultimately avoiding the stationary 
state — this irresistible necessity that the stream of human 
industry should finally spread itself out into an apparently 
stagnant sea — must have been, to the political economists 
of the last two generations, an unpleasing and discouraging 
prospect ; for the tone and tendency of their speculations 
goes completely to identify all that is economically desirable 
with the progressive state, and with that alone. With Mr. 
M'Culloch, for example, prosperity does not mean a large 
production and a good distribution of wealth, but a rapid 
increase of it ; his test of prosperity is high profits ; and as 
the tendency of that very increase of wealth, which he calls 
prosperity, is towards low profits, economical progress, ac- 
cording to him, must tend to the extinction of prosperity. 
Adam Smith always assumes that the condition of the mass 
of the people, though it may not be positively distressed, 
must be pinched and stinted in a stationary condition of 
wealth, and can only be satisfactory in a progressive state. 
The doctrine that, to however distant a time incessant 
struggling may put off our doom, the progress of society 
must " end in shallows and in miseries," far from being, as 
many people still believe, a wicked invention of Mr. Mal- 
thus, was either expressly or tacitly affirmed by his most 
distinguished predecessors, and can only be successfully 
combated on his principles. Before attention had been 
directed to the principle of population as the active force in 
determining the remuneration of labour, the increase of 
mankind was virtually treated as a constant quantity : it 
was, at all events, assumed that in the natural and normal 
state of human affairs population must constantly increase, 
from which it followed that a constant increase of the means 
of support was essential to the physical comfort of the mass 
of mankind. The publication of Mr. Malthus' Essay is the 
era from which better views of this subject must be dated ; 
and notwithstanding the acknowledged errors of his first 
edition, few writers have done more than himself, in the 
subsequent editions, to promote these juster and more hope- 
ful anticipations. 



336 B00K IV - CHAPTER VI. §2. 

Even in a progressive state of capital, in old countries, a 
conscientious or prudential restraint on population is indis- 
pensable, to prevent the increase of numbers from outstrip- 
ping the increase of capital, and the condition of the classes 
who are at the bottom of society from being deteriorated. 
Where there is not, in the people, or in some very large pro- 
portion of them, a resolute resistance to this deterioration — 
a determination to preserve an established standard of com- 
fort — the condition of the poorest class sinks, even in a pro- 
gressive state, to the lowest point which they will consent 
to endure. The same determination would be equally 
effectual to keep up their condition in the stationary state, 
and would be quite as likely to exist. Indeed, even now, 
the countries in which the greatest prudence is manifested 
in the regulating of population, are often those in which 
capital increases least rapidly. Where there is an indefinite 
prospect of employment for increased numbers, there is apt 
to appear less necessity for prudential restraint. If it were 
evident that a new hand could not obtain employment but 
by displacing, or succeeding to, one already employed, the 
combined influences of prudence and public opinion might in 
some measure be relied on for restricting the coming genera- 
tion within the numbers necessary for replacing the present. 

§ 2. I cannot, therefore, regard the stationary state of 
capital and wealth with the unaffected aversion so generally 
manifested towards it by political economists of the old 
school. I am inclined to believe that it would be, on the 
whole, a very considerable improvement on our present 
condition. I confess I am not charmed with the ideal of 
life held out by those who think that the normal state of 
human beings is that of struggling to get on ; that the 
trampling, crushing, elbowing, and treading on each other's 
heels, which form the existing type of social life, are the 
most desirable lot of human kind, or anything but the dis- 
agreeable symptoms of one of the phases of industrial prog- 
ress. The northern and middle states of America are a 



THE STATIONARY STATE. 337 

specimen of this stage of civilization in very favourable cir- 
cumstances ; having, apparently, got rid of all social injust- 
ices and inequalities that affect persons of Caucasian race 
and of the male sex, while the proportion of population to 
capital and land is such as to ensure abundance to every 
able-bodied member of the community who does not forfeit 
it by misconduct. They have the six points of Chartism, 
and they have no poverty : and all that these advantages 
seem to have yet done for them (notwithstanding some 
incipient signs of a better tendency) is that the life of the 
whole of one sex is devoted to dollar-hunting, and of the 
other to breeding dollar-hunters. This is not a kind of 
social perfection which philanthropists to come will feel any 
very eager desire to assist in realizing. Most fitting, indeed, 
is it, that while riches are power, and to grow as rich as pos- 
sible the universal object of ambition, the path to its attain- 
ment should be open to all, without favour or partiality. 
But the best state for human nature is that in which, while 
no one is poor, no one desires to be richer, nor has any 
reason to fear being thrust back, by the efforts of others to 
push themselves forward. 

That the energies of mankind should be kept in em- 
ployment by the struggle for riches, as they were formerly 
by the struggle of war, until the better minds succeed in 
educating the others into better things, is undoubtedly 
more desirable than that they should rust and stagnate. 
While minds are coarse they require coarse stimuli, and 
let them have them. In the meantime, those who do not 
accept the present very early stage of human improvement 
as its ultimate type, may be excused for being comparatively 
indifferent to the kind of economical progress which excites 
the congratulations of ordinary politicians ; the mere in- 
crease of production and accumulation. For the safety of 
national independence it is essential that a country should 
not fall much behind its neighbours in these things. But in 
themselves they are of little importance, so long as either the 
increase of population or anything else prevents the mass of 
61 



338 B0 °K IV. CHAPTER VI. §2. 

the people from reaping any part of the benefit of them. I 
know not why it should be matter of congratulation that 
persons who are already richer than any one needs to be, 
should have doubled their means of consuming things which 
give little or no pleasure except as representative of wealth ; 
or that numbers of individuals should pass over, every year, 
from the middle classes into a richer class, or from the class 
of the occupied rich to that of the unoccupied. It is only 
in the backward countries of the world that increased pro- 
duction is still an important object : in those most advanced, 
what is economically needed is a better distribution, of 
which one indispensable means is a stricter restraint on popu- 
lation. Levelling institutions, either of a just or of an 
unjust kind, cannot alone accomplish it ; they may lower 
the heights of society, but they cannot, of themselves, per- 
manently raise the depths. 

On the other hand, we may suppose this better distribu- 
tion of property attained, by the joint effect of the prudence 
and frugality of individuals, and of a system of legislation 
favouring equality of fortunes, so far as is consistent with 
the just claim of the individual to the fruits, whether great 
or small, of his or her own industry. We may suppose, for 
instance, (according to the suggestion thrown out in a for- 
mer chapter,*) a limitation of the sum which any one per- 
son may acquire by gift or inheritance, to the amount suffi- 
cient to constitute a moderate independence. Under this 
twofold influence, society would exhibit these leading fea- 
tures : a well-paid and affluent body of labourers ; no enor- 
mous fortunes, except what were earned and accumulated 
during a single lifetime ; but a much larger body of persons 
than at present, not only exempt from the coarser toils, but 
with sufficient leisure, both physical and mental, from me- 
chanical details, to cultivate freely the graces of life, and 
afford examples of them to the classes less favourably cir- 
cumstanced for their growth. This condition of society, so 
greatly preferable to the present, is not only perfectly com- 

* Supra, vol. i. pp. 288-91. 



THE STATIONARY STATE. 339 

patible with the stationary state, but, it would seem, more 
naturally allied with that state than with any other. 

There is room in the world, no doubt, and even in old 
countries, for a great increase of population, supposing the 
arts of life to go on improving, and capital to increase. 
But even if innocuous, I confess I see very little reason for 
desiring it. The density of population necessary to enable 
mankind to obtain, in the greatest degree, all the advan- 
tages both of co-operation and of social intercourse, has, in all 
the most populous countries, been attained. A population 
may be too crowded, though all be amply supplied with 
food and raiment. It is not good for man to be kept per- 
force at all times in the presence of his species. A world 
from which solitude is extirpated, is a very poor ideal. 
Solitude, in the sense of being often alone, is essential to 
any depth of meditation or of character ; and solitude in 
the presence of natural beauty and grandeur, is the cradle 
of thoughts and aspirations which are not only good for the 
individual, but which society could ill do without. Nor is 
there much satisfaction in contemplating the world with 
nothing left to the spontaneous activity of nature ; with 
every rood of land brought into cultivation, which is capable 
of growing food for human beings ; every flowery waste or 
natural pasture ploughed up, all quadrupeds or birds which 
are not domesticated for man's use exterminated as his 
rivals for food, every hedgerow or superfluous tree rooted 
out, and scarcely a place left where a wild shrub or flower 
could grow without being eradicated as a weed in the name 
of improved agriculture. If the earth must lose that great 
portion of its pleasantness which it owes to things that the 
unlimited increase of wealth and population would extirpate 
from it, for the mere purpose of enabling it to support a 
larger, but not a better or a happier population, I sincerely 
hope, for the sake of posterity, that they will be content to 
be stationary, long before necessity compels them to it. 

It is scarcely necessary to remark that a stationary condi- 
tion of capital and population implies no stationary state of 



340 BOOK IV. CHAPTER VI. §2. 

human improvement. There would be as much scope as 
ever for all kinds of mental culture, and moral and social 
progress ; as much room for improving the Art of Living, 
and much more likelihood of its being improved, when 
minds ceased to be engrossed by the art of getting on. 
Even the industrial arts might be as earnestly and as suc- 
cessfully cultivated, with this sole difference, that instead of 
serving no purpose but the increase of wealth, industrial 
improvements would produce their legitimate effect, that of 
abridging labour. Hitherto it is questionable if all the 
mechanical inventions yet made have lightened the day's 
toil of any human being. They have enabled a greater 
population to live the same life of drudgery and imprison- 
ment, and an increased number of manufacturers and others 
to make fortunes. They have increased the comforts of the 
middle classes. But they have not yet begun to effect those 
great changes in human destiny, which it is in their nature 
and in their futurity to accomplish. Only when, in addi- 
tion to just institutions, the increase of mankind shall be 
under the deliberate guidance of judicious foresight, can the 
conquests made from the powers of nature by the intellect 
and energy of scientific discoverers, become the common pro- 
perty of the species, and the means of improving and eleva- 
ting the universal lot. 



CHAPTER VII. 

ON THE PROBABLE FUTURITY OF THE LABOURING 

CLASSES. 

§ 1. The observations in the preceding chapter had for 
their principal object to deprecate a false ideal of human 
society. Their applicability to the practical purposes of 
present times, consists in moderating the inordinate impor- 
tance attached to the mere increase of production, and fixing 
attention upon improved distribution, and a large remu- 
neration of labour, as the two desiderata. Whether the 
aggregate produce increases absolutely or not, is a thing in 
which, after a certain amount has been obtained, neither 
the legislator nor the philanthropist need feel any strong 
interest : but, that it should increase relatively to the num- 
ber of those who share in it, is of the utmost possible im- 
portance ; and this, (whether the wealth of mankind be 
stationary, or increasing at the most rapid rate ever known 
in an old country,) must depend on the opinions and habits 
of the most numerous class, the class of manual labourers. 

When I speak, either in this place or elsewhere, of " the 
labouring classes," or of labourers as a " class," I use those 
phrases in compliance with custom, and as descriptive of 
an existing, but by no means a necessary or permanent, 
state of social relations. I do not recognize as either just or 
salutary, a state of society in which there is any " class" 
which is not labouring ; any human beings, exempt from 
bearing their share of the necessary labours of human life, 
except those unable to labour, or who have fairly earned 



34:2 BOOK IV. CHAPTER VII. §1. 

rest by previous toil. So long, however, as the great social 
evil exists of a non-labouring class, labourers also constitute 
a class, and may be spoken of, though only provisionally, 
in that character. 

Considered in its moral and social aspect, the state 
of the labouring people has latterly been a subject of much 
more speculation and discussion than formerly ; and the 
opinion, that it is not now what it ought to be, has become 
very general. The suggestions which have been promul- 
gated, and the controversies which have been excited, on 
detached points rather than on the foundations of the sub- 
ject, have put in evidence the existence of two conflicting 
theories, respecting the social position desirable for manual 
labourers. The one may be called the theory of depend- 
ence and protection, the other that of self-dependence. 

According to the former theory, the lot of the poor, in 
all things which affect them collectively, should be regula- 
ted for them, not by them. They should not be required 
or encouraged to think for themselves, or give to their own 
reflection or forecast an influential voice in the determina- 
tion of their destiny. It is supposed to be the duty of the 
higher classes to think for them, and to take the responsi- 
bility of their lot, as the commander and officers of an army 
take that of the soldiers composing it. This function, it is 
contended, the higher classes should prepare themselves to 
perform conscientiously, and their whole demeanour should 
impress the poor with a reliance on it, in order that, while 
yielding passive and active obedience to the rules prescribed 
for them, they may resign themselves in all other respects 
to a trustful insouciance, and repose under the shadow of 
their protectors. The relation between rich and poor, ac- 
cording to this theory, (a theory also applied to the relation 
between men and women) should be only partly authorita- 
tive ; it should be amiable, moral, and sentimental : affec- 
tionate tutelage on the one side, respectful and grateful def- 
erence on the other. The rich should be in loco parentis 
to the poor, guiding and restraining them like children. 



PROBABLE FUTURE OF THE LABOURING CLASSES. 343 

Of spontaneous action on their part there should be no 
need. They should be called on for nothing but to do their 
day's work, and to be moral and religious. Their morality 
and religion should be provided for them by their superiors, 
who should see them properly taught it, and should do all 
that is necessary to ensure their being, in return for labour 
and attachment, properly fed, clothed, housed, spiritually 
edified, and innocently amused. 

This is the ideal of the future, in the minds of those 
whose dissatisfaction with the Present assumes the form of 
affection and regret towards the Past. Like other ideals, it 
exercises an unconscious influence on the opinions and senti- 
ments of numbers who never consciously guide themselves 
by any ideal. It has also this in common with other ideals, 
that it has never been historically realized. It makes its 
appeal to our imaginative sympathies in the character of a 
restoration of the good times of our forefathers. But no 
times can be pointed out in which the higher classes of this 
or any other country performed a part even distantly re- 
sembling the one assigned to them in this theory. It is an 
idealization, grounded on the conduct and character of here 
and there an individual. All privileged and powerful 
classes, as such, have used their power in the interest of 
their own selfishness, and have indulged their self-impor- 
tance in despising, and not in lovingly caring for, those who 
were, in their estimation, degraded, by being under the 
necessity of working for their benefit. I do not affirm that 
what has always been must always be, or that human im- 
provement has no tendency to correct the intensely selfish 
feelings engendered by power ; but though the evil may 
be lessened, it cannot be eradicated, until the power itself is 
withdrawn. This, at least, seems to me undeniable, that long 
before the superior classes could be sufficiently improved 
to govern in the tutelary manner supposed, the inferior 
classes would be too much improved to be so governed. 

I am quite sensible of all that is seductive in the picture 
of society which this theory presents. Though the facts of 



344: B °0 K IV. CHAPTER VII. § 1. 

it have no prototype in the past, the feelings have. In 
them lies all that there is of reality in the conception. As 
the idea is essentially repulsive of a society only held to- 
gether by the relations and feelings arising out of pecuniary 
interests, so there is something naturally attractive in a 
form of society abounding in strong personal attachments 
and disinterested self-devotion. Of such feelings it must be 
admitted that the relation of protector and protected has 
hitherto been the richest source. The strongest attachments 
of human beings in general, are towards the things or the 
persons that stand between them and some dreaded evil. 
Hence, in an age of lawless violence and insecurity, and 
general hardness and roughness of manners, in which life is 
beset with dangers and sufferings at every step, to those 
who have neither a commanding position of their own, nor 
a claim on the protection of some one who has — a generous 
giving of protection, and a grateful receiving of it, are the 
strongest ties which connect human beings ; the feelings 
arising from that relation are their warmest feelings ; all the 1 
enthusiasm and tenderness of the most sensitive natures gather 
round it ; loyalty on the one part and chivalry on the other 
are principles exalted into passions. I do not desire to de- 
preciate these qualities. The error lies in not perceiving, 
that these virtues and sentiments, like the clanship and the 
hospitality of the wandering Arab, belong emphatically to 
a rude and imperfect state of the social union, and that the 
feelings between protector and protected, whether between 
kings and subjects, rich and poor, or men and women, can 
no longer have this beautiful and endearing character, 
where there are no longer any serious dangers from which 
to protect. What is there in the present state of society to 
make it natural that human beings, of ordinary strength 
and courage, should glow with the warmest gratitude and 
devotion in return for protection ? The laws protect them, 
wherever the laws do not criminally fail in their duty. To 
be under the power of some one, instead of being as for- 
merly the sole condition of safety, is now, speaking gen- 



PROBABLE FUTURE OF THE LABOURING CLASSES. 345 

erally, the only situation which exposes to grievous wrong. 
The so-called protectors are now the only persons against 
whom, in any ordinary circumstances, protection is needed. 
The brutality and tyranny with which every police report 
is filled, are those of husbands to wives, of parents to chil 
dren. That the law does not prevent these atrocities, that it 
is only now making a first timid attempt to repress and pun- 
ish them, is no matter of necessity, but the deep disgrace 
of those by whom the laws are made and administered. 
No man or woman who either possesses or is able to earn 
an independent livelihood, requires any other protection 
than that which the law could and ought to give. This be- 
ing the case, it argues great ignorance of human nature to 
continue taking for granted that relations founded on pro- 
tection must always subsist, and not to see that the assump- 
tion of the part of protector, and of the power which be- 
longs to it, without any of the necessities which justify it, 
must engender feelings opposite to loyalty. 

Of the working men, at least in the more advanced 
countries of Europe, it may be pronounced certain, that the 
patriarchal or paternal system of government is one to 
which they will not again be subject. That question was 
decided, when they were taught to read, and allowed access 
to newspapers and political tracts ; when dissenting preach- 
ers were suffered to go among them, and appeal to their 
faculties and feelings in opposition to the creeds professed and 
countenanced by their superiors ; when they were brought 
together in numbers, to work socially under the same roof; 
when railways enabled them to shift from place to place, and 
change their patrons and employers as easily as their coats ; 
when they were encouraged to seek a share in the govern- 
ment, by means of the electoral franchise. The working 
classes have taken their interests into their own hands, and 
are perpetually showing that they think the interests of 
their employers not identical with their own, but opposite 
to them. Some among the higher classes flatter them- 
selves that these tendencies may be counteracted by moral 



346 BOOK IV. CHAPTER VII. §2. 

and religious education ; but they have let the time go bj> 
for giving an education which can serve their purpose. 
The principles of the Reformation have reached as low 
down in society as reading and writing, and the poor will 
not much longer accept morals and religion of other peo- 
ple's prescribing. I speak more particularly of this country, 
especially the town population, and the districts of the most 
scientific agriculture or the highest wages, Scotland and the 
north of England. Among the more inert and less mod- 
ernized agricultural population of the southern counties, it 
might be possible for the gentry to retain, for some time 
longer, something of the ancient deference and submission 
of the poor, by bribing them with high wages and constant 
employment ; by ensuring them support, and never requir- 
ing them to do anything which they do not like. But 
these are two conditions which never have been combined, 
and never can be, for long together. A guarantee of sub- 
sistence can only be practically kept up, when work is en- 
forced, and superfluous multiplication restrained, by at least 
a moral compulsion. It is then, that the would-be revivers 
of old times which they do not understand, would feel 
practically in how hopeless a task they were engaged. The 
whole fabric of patriarchal or seignorial influence, attempted 
to be raised on the foundation of caressing the poor, would 
be shattered against the necessity of enforcing a stringent 
Poor-law. 

§ 2. It is on a far other basis that the well-being and 
well-doing of the labouring people must henceforth rest. 
The poor have come out of leading-strings, and cannot any 
longer be governed or treated like children. To their own 
qualities must now be commended the care of their destiny. 
Modern nations will have to learn the lesson, that the well- 
being of a people must exist by means of the justice and 
self-government, the Sucaioo-vvrj and aaxf)po<rvvr], of the indi- 
vidual citizens. The theory of dependence attempts to dis- 
pense with the necessity of these qualities in the dependent 



PROBABLE FUTURE OF THE LABOURING CLASSES. 347 

classes. But now, when even in position they are becoming 
less and less dependent, and their minds less and less acqui- 
escent in the degree of dependence which remains, the 
virtues of independence are those which they stand in need 
of. Whatever advice, exhortation, or guidance is held out 
to the labouring classes, must henceforth be tendered to 
them as equals, and accepted with their eyes open. The 
prospect of the future depends on the degree in which they 
can be made rational beings. 

There is no reason to believe that prospect other than 
hopeful. The progress indeed has hitherto been, and still 
is, slow. But there is a spontaneous education going on in 
the minds of the multitude, which may be greatly accelera- 
ted and improved by artificial aids. The instruction ob- 
tained from newspapers and political tracts is not the best 
sort of instruction, but it is vastly superior to none at 
all. The institutions for lectures and discussion, the collec- 
tive deliberations on questions of common interest, the 
trades unions, the political agitation, all serve to awaken 
public spirit, to diffuse variety of ideas among the mass, 
and to excite thought and reflection in the more intelligent. 
Although the too early attainment of political franchises 
by the least educated class might retard, instead of promot- 
ing, their improvement, there can be little doubt that it has 
been greatly stimulated by the attempt to acquire them. In 
the meantime, the working classes are now part of the pub- 
lic ; in all discussions on matters of general interest they, or 
a portion of them, are now partakers ; all who use the 
press as an instrument may, if it so happens, have them 
for an audience ; the avenues of instruction through which 
the middle classes acquire such ideas as they have, 
are accessible to, at least, the operatives in the towns. 
With these resources, it cannot be doubted that they will 
increase in intelligence, even by their own unaided efforts ; 
while there is reason to hope that great improvements both 
in the quality and quantity of school education will be 
effected by the exertions either of government or of indi- 



348 BOOK IV. CHAPTER VII. §3. 

viduals, and that the progress of the mass of the people in 
mental cultivation, and in the virtues which are dependent 
on it, will take place more rapidly, and with fewer inter- 
mittences and aberrations, than if left to itself. 

From this increase of intelligence, several effects may 
be confidently anticipated. First : that they will become 
even less willing than at present to be led and governed, 
and directed into the way they should go, by the mere 
authority and prestige of superiors. If they have not now, 
still less will they have hereafter, any deferential awe, or 
religious principle of obedience, holding them in mental 
subjection to a class above them. The theory of depend- 
ence and protection will be more and more intolerable to 
them, and they will require that their conduct and con- 
dition shall be essentially self-governed. It is, at the same 
time, quite possible that they may demand, in many cases, 
the intervention of the legislature in their affairs, and the 
regulation by law of various things which concern them, 
often under very mistaken ideas of their interest. Still, it 
is their own will, their own ideas and suggestions, to which 
they will demand that effect should be given, and not rules 
laid down for them by other people. It is quite consistent 
with this, that they should feel respect for superiority of 
intellect and knowledge, and defer much to the opinions, 
on any subject, of those whom they think well acquainted 
with it. Such deference is deeply grounded in human 
nature ; but they will judge for themselves of the persons 
who are and are not entitled to it. 

§ 3. It appears to me impossible but that the increase 
of intelligence, of education, and of the love of indepen- 
dence among the working classes, must be attended with a 
corresponding growth of the good sense which manifests 
itself in provident habits of conduct, and that population, 
therefore, will bear a gradually diminishing ratio to capital 
and employment. This most desirable result would be 
much accelerated by another change, which lies in the 



PROBABLE FUTURE OF THE LABOURING CLASSES. 34.9 

direct line of the best tendencies of the time ; the opening 
of industrial occupations freely to both sexes. The same 
reasons which make it no longer necessary that the poor 
should depend on the rich, make it equally unnecessary that 
women should depend on men, and the least which justice 
requires is that law and custom should not enforce depen- 
dence (when the correlative protection has become superflu- 
ous) by ordaining that a woman, who does not happen to 
have a provision by inheritance, shall have scarcely any 
means open to her of gaining a livelihood, except as a wife 
and mother. Let women who prefer that occupation, 
adopt it ; but that there should be no option, no other car- 
riere possible for the great majority of women, except in the 
humbler departments of life, is a flagrant social injustice. 
The ideas and institutions by which the accident of sex is 
made the groundwork of an inequality of legal rights, and 
a forced dissimilarity of social functions, must ere long be 
recognised as the greatest hindrance to moral, social, and 
even intellectual improvement. On the present occasion I 
shall only indicate, among the probable consequences of the 
industrial and social independence of women, a great dimi- 
nution of the evil of overpopulation. It is by devoting 
one-half of the human species to that exclusive function, by 
making it fill the entire life of one sex, and interweave itself 
with almost all the objects of the other, that the animal 
instinct in question is nursed into the disproportionate pre- 
ponderance which it has hitherto exercised in human life. 

§ 4. The political consequences of the increasing power 
and importance of the operative classes, and of the growing 
ascendancy of numbers, which even in England and under 
the present institutions, is rapidly giving to the will of the 
majority at least a negative voice in the acts of government, 
are too wide a subject to be discussed in this place. But, 
confining ourselves to economical considerations, and not- 
withstanding *the effect which improved intelligence in the 
working classes, together with just laws, may have in alter- 



350 BOOK IV. CHAPTER VII. §4. 

ing the distribution of the produce to their advantage, I 
cannot think that they will be permanently contented with 
the condition of labouring for wages as their ultimate state. 
They may be willing to pass through the class of servants 
in their way to that of employers ; but not to remain in it 
all their lives. To begin as hired labourers, then after a 
few years to work on their own account, and finally employ 
others, is the normal condition of labourers in a new coun- 
try, rapidly increasing in wealth and population, like 
America or Australia. But in an old and fully peopled 
country, those who begin life as labourers for hire, as a 
general rule, continue such to the end, unless they sink into 
the still lower grade of recipients of public charity. In the 
present stage of human progress, when ideas of equality are 
daily spreading more widely among the poorer classes, and 
can no longer be checked by anything short of the entire 
suppression of printed discussion and even of freedom of 
speech, it is not to be expected that the division of the 
human race into two hereditary classes, employers and em- 
ployed, can be permanently maintained. The relation is 
nearly as unsatisfactory to the payer of wages as to the re- 
ceiver. If the rich regard the poor as, by a kind of natural 
law, their servants and dependants, the rich in their turn are 
regarded as a mere prey and pasture for the poor ; the 
subject of demands and expectations wholly indefinite, 
increasing in extent with every concession made to them. 
The total absence of regard for justice or fairness in the 
relations between the two, is as marked on the side of the 
employed as on that of the employers. We look in vain 
among the working classes in general for the just pride which 
will choose to give good work for good wages : for the most 
part, their sole endeavour is to receive as much, and return 
as little in the shape of service, as possible. It will sooner 
or later become insupportable to the employing classes to 
live in close and hourly contact with persons whose inter- 
ests and feelings are in hostility to them Capitalists are 
almost as much interested as labourers, in placing the 



PROBABLE FUTURE OP THE LABOURING CLASSES. 351 

operations of industry on such a footing, that those who 
labour for them may feel the same interest in the work, 
which is felt by those who labour on their own account. 

The opinion expressed in a former part of this treatise 
respecting small landed properties and peasant proprietors, 
may have made the reader anticipate that a wide diffusion 
of property in land is the resource on which I rely for ex- 
empting at least the agricultural labourers from exclusive 
dependence on labour for hire. Such, however, is not my 
opinion. I indeed deem that form of agricultural economy to 
be most groundlessly cried down, and to be greatly prefer- 
able, in its aggregate effects on human happiness, to hired 
labour in any form in which it exists at present ; because 
the prudential check to population acts more directly, and 
is shown by experience to be more efficacious ; and because, 
in point of security, of independence, of exercise for any 
other than the animal faculties, the state of a peasant pro- 
prietor is far superior to that of an agricultural labourer in 
this or any other old country. Where the former system 
already exists, and works on the whole satisfactorily, I 
should regret, in the present state of human intelligence, to 
see it abolished in order to make way for the other, under a 
pedantic notion of agricultural improvement as a thing 
necessarily the same in every diversity of circumstances. 
In a backward state of industrial improvement, as in Ire- 
land, I should urge its introduction, in preference to an 
exclusive system of hired labour ; as a more powerful in- 
strument for raising a population from semi-savage list- 
lessness and recklessness, to persevering industry and pru- 
dent calculation. 

But a people who have once adopted the large system 
of production, either in manufactures or in agriculture, are 
not likely to recede from it ; and when population is kept 
in due proportion to the means of support, it is not desira- 
ble that they should. Labour is unquestionably more pro- 
ductive on the system of large industrial enterprises ; the 
produce, if not greater absolutely, is greater in proportion 



352 BOOK IT. CHAPTER VII. §4. 

to the labour employed : the same number of persons can 
be supported equally well with less toil and greater leisure ; 
which will be wholly an advantage, as soon as civilization 
and improvement have so far advanced, that what is a 
benefit to the whole shall be a benefit to each individual 
composing it. And in the moral aspect of the question, 
which is still more important than the economical, some- 
thing better should be aimed at as the goal of industrial 
improvement, than to disperse mankind over the earth in 
single families, each ruled internally, as families now are, 
by a patriarchal despot, and having scarcely any com- 
munity of interest, or necessary mental communion, with 
other human beings. The domination of the head of the 
family over the other members, in this state of things, is 
absolute ; while the effect on his own mind tends towards 
concentration of all interests in the family, considered as an 
expansion of self, and absorption of all passions in that of 
exclusive possession, of all cares in those of preservation 
and acquisition. As a step out of the merely animal state 
into the human, out of reckless abandonment to brute in- 
stincts into prudential foresight and self-government, this 
moral condition may be seen without displeasure. But if 
public spirit, generous sentiments, or true justice and equal- 
ity are desired, association, not isolation, of interests, is the 
school in which these excellences are nurtured. The aim of 
improvement should be not solely to place human beings in 
a condition in which they will be able to do without one 
another, but to enable them to work with or for one an- 
other in relations not involving dependence. Hitherto 
there has been no alternative for those who lived by their 
labour, but that of labouring either each for himself alone, 
or for a master. But the civilizing and improving influ- 
ences of association, and the efficiency and economy of pro- 
duction on a large scale, may be obtained without dividing 
the producers into two parties with hostile interests and 
feelings, the many who do the work being mere servants 
under the command of the one who supplies the funds, and 



PROBABLE FUTURE OF THE LABOURING CLASSES. 353 

having 110 interest of their own in the enterprise except to 
earn their wages with as little labour as possible. The 
speculations and discussions of the last fifty years, and the 
events of the last ten, are abundantly conclusive on this 
point. If the improvement which even triumphant mili- 
tary despotism has only retarded, not stopped, shall con- 
tinue its course, there can be little doubt that the status of 
hired labourers will gradually tend to confine itself to the 
description of workpeople whose low moral qualities render 
them unfit for anything more independent : and that the 
relation of masters and workpeople will be gradually superse- 
ded by partnership, in one of two forms : temporarily and 
in some cases, association of the labourers with the capital- 
ist ; in other cases, and perhaps finally in all, association 
of labourers among themselves. 

§ 5. The first of these forms of association has long 
been practised, not indeed as a rule, but as an exception. 
In several departments of industry there are already cases 
in which every one who contributes to the work, either by 
labour or by pecuniary resources, has a partner's interest in 
it, proportional to the value of his contribution. It is 
already a common practice to remunerate those in whom 
peculiar trust is reposed, by means of a percentage on the pro- 
fits : and cases exist in which the principle is, with excellent 
success, carried down to the class of mere manual labourers. 

In the American ships trading to China, it has long been 
the custom for every sailor to have an interest in the profits 
of the voyage ; and to this has been ascribed the general 
good conduct of those seamen, and the extreme rarity of 
any collision between them and the government or people 
of the country. An instance in England, not so well known 
as it deserves to be, is that of the Cornish miners. " In 
Cornwall the mines are worked strictly on the system of 
joint adventure ; gangs of miners contracting with the 
agent, who represents the owner of the mine, to execute a 
certain portion of a vein, and fit the ore for market, at the 
62 



g54 BOOK IV. CHAPTER VII. §5. 

price of so much in the pound of the sum for which the ore 
is sold. These contracts are put up at certain regular 
periods, generally every two months, and taken by a volun- 
tary partnership of men accustomed to the mine. This 
system has its disadvantages, in consequence of the uncer- 
tainty and irregularity of the earnings, arid consequent ne- 
cessity of living for long periods on credit ; but it has ad- 
vantages which more than counterbalance these draw- 
backs. It produces a degree of intelligence, independ- 
ence, and moral elevation, which raise the condition and 
character of the Cornish miner far above that of the gene- 
rality of the labouring class. We are told by Dr. Barham, 
that ' they are not only, as a class, intelligent for labourers, 
but men of considerable knowledge.' Also, that ' they 
have a character of independence, something American, the 
system by which the contracts are let giving the takers 
entire freedom to make arrangements among themselves ; so 
that each man feels, as a partner in his little firm, that he meets 
his employers on nearly equal terms.' . . . With this 
basis of intelligence and independence in their character, we 
are not surprised when we hear that ' a very great number 
of miners are now located on possessions of their own, leased 
for three lives or ninety-nine years, on which they have built 
houses;' or that ' 281,541?. are deposited in savings banks 
in Cornwall, of which two-thirds are estimated to belong to 
miners.' "* 

Mr. Babbage, who also gives an account of this system, 
observes that the payment to the crews of whaling ships is 
governed by a similar principle ; and that " the profits 
arising from fishing with nets on the south coast of England 
are thus divided : one-half the produce belongs to the 
owner of the boat and net ; the other half is divided in 
equal portions between the persons using it, who are also 
bound to assist in repairing the net when required." Mr. 

* This passage is from the Prize Essay on the Causes and Remedies of Na- 
tional Distress, by Mr. Samuel Laing. The extracts which it includes are from 
the Appendix to the Report of the Children's Employment Commission. 



PROBABLE FUTURE OF THE LABOURING CLASSES. 355 

Babbage has the great merit of having pointed out the 
practicability, and the advantage, of extending the princi- 
ple to manufacturing industry generally.* 

Some attention has been excited by an experiment of 
this nature, commenced about sixteen years ago by a Paris 
tradesman, a house-painter, M. Leclaire ;f and described by 
him in a pamphlet published in the year 18-12. M. Leclaire, 
according to his statement, employs on an average two 
hundred workmen, whom he pays in the usual manner, by 
fixed wages or salaries. He assigns to himself, besides 
interest for his capital, a fixed allowance for his labour 
and responsibility as manager. At the end of the year, the 
surplus profits are divided among the body, himself included, 
in the proportion of their salaries.^ The reasons by which 
M. Leclaire was led to adopt this system are highly instruct- 
ive. Finding the conduct of his workmen unsatisfactory, 
he first tried the effect of giving higher wages, and by this 
he managed to obtain a body of excellent workmen, who 
would not quit his service for any other. "Having thus 
succeeded" (I quote from an abstract of the pamphlet in 
Chambers' Journal,§) " in producing some sort of stability 
in the arrangements of his establishment, M. Leclaire ex- 
pected, he says, to enjoy greater peace of mind. In this, 
however, he was disappointed. So long as he was able to 
superintend everything himself, from the general concerns 
of his business down to its minutest details, he did enjoy a 
certain satisfaction ; but from the moment that, owing to 
the increase of his business, he found that he could be 

* Economy of Machinery and Manufactures, 3rd edition, chap. 26. 

+ His establishment is (or was) 11, Rue Saint Georges. 

\ It appears, however, that the workmen whom M. Leclaire had admitted to 
this participation of profits, were only a portion (rather less than half) of the 
whole number whom he employed. This is explained by another part of his sys- 
tem. M. Leclaire pays the full market rate of wages to all his workmen. The 
share of profit assigned to them is, therefore, a clear addition to the ordinary 
gains of their class, which he very laudably uses as an instrument of improve- 
ment, by making it the reward of desert, or the recompense for peculiar trust. 

§ For September 27, 1845. 



356 BOOK IV. CHAPTER VII. §5. 

nothing more than the centre from which orders were issued, 
and to which reports were brought in, his former anxiety 
and discomfort returned upon him." He speaks lightly 
of the other sources of anxiety to which a tradesman is 
subject, but describes as an incessant cause of vexation the 
losses arising from the misconduct of workmen. An em- 
ployer " will find workmen whose indifference to his interests 
is such that they do not perform two-thirds of the amount 
of work which they are capable of; hence the continual 
fretting of masters, who, seeing their interests neglected, 
believe themselves entitled to suppose that workmen are con- 
stantly conspiring to ruin those from whom they derive their 
livelihood. If the journeyman were sure of constant em- 
ployment, his position would in some respects be more 
enviable than that of the master, because he is assured of a 
certain amount of day's wages, which he will get whether he 
works much or little. He runs no risk, and has no other 
motive to stimulate him to do his best than his own sense 
of duty. The master, on the other hand, depends greatly 
on chance for his returns : his position is one of continual 
irritation and anxiety. This would no longer be the 
case to the same extent, if the interests of the master and 
those of the workmen were bound up with each other, con- 
nected by some bond of mutual security, such as that 
which would be obtained by the plan of a yearly division of 
profits." 

Even in the first year during which M. Leclaire's experi- 
ment was in complete operation, the success was remarkable. 
JSTot one of his journeymen who worked as many as three 
hundred days, earned in that year less than 1500 francs, and 
some considerably more. His highest rate of daily wages 
being four francs, or 1200 francs for 300' days, the remaining 
800 francs, or 12Z., must have been the smallest amount 
which any journeyman, who worked that number of days, 
obtained as his proportion of the surplus profit. M. Leclaire 
describes in strong terms the improvement which was already 
manifest in the habits and demeanour of his workmen, not 



PROBABLE FUTURE OF THE LABOURING CLASSES. 357 

merely when at work, and in their relations with their em- 
ployer, but at other times and in other relations, showing 
increased respect both for others and for themselves. M. 
Chevalier, in a work published in 1848, stated on M. Le- 
claire's authority, that the increased zeal of the workpeople 
continued to be a full compensation to him, even in a 
pecuniary sense, for the share of profit which he renounced 
in their favour.* And M. Yilliaume, in 1857, f observes : — 
" Quoiqu'il ait toujours banni la fraude, qui n'est que trop 
frequente dans sa profession, il a toujours pu soutenir la con- 
currence et acquerir une belle aisance, malgre l'abandon 
d'une si large part de ses profits. Assurement il n'y est 
parvenu que parce que l'activite inusitee de ses ouvriers, et 
la surveillance qu'ils exercaient les uns sur les autres dans les 
nombreux chantiers, avaint compense la diminution de ses 
profits personnels." 

The beneficent example set by M. Leclaire has been fol- 
lowed, with brilliant success, by other employers of labour 
on a large scale at Paris ; and I annex, from the work last 
referred to (one of the ablest of the many able treatises on 
political economy produced by the present generation of the 
political economists of France), some signal examples of the 
economical and moral benefit arising from this admirable 
arrangement.:}: 

§ 6. The form of association, however, which if man- 
kind continue to improve, must be expected in the end to 



* Lettres sur l'Organisation du Travail, par Michel Chevalier, lettre xiv. 

\ Nouveau Traite d'Economie Politique. 

| "En Mars 1847, M. Paul Dupont, gerant d'une imprimerie de Paris, eut 
l'idee d'assoeier ses ouvriers en leur promettant le dixieme des benefices. II en 
emploie liabituellement trois cents, dont deux cents travaillent aux pieces et 
cent a la journee. II emploie, en outre, cent auxiliaires, qui ne font pas partie 
dt> l'association. 

" La part de benefice avenant aux ouvriers ne leur vaut puere, en moyenne. 
qu'une quinzaine de jours de travail; mais ils reeoiveut leur salaire ordiuaire 
suivant le tarif 6tabli dans toutes les grandes imprimerics de Paris; et, de plus, 
ils out l'avantage d'etre soignes dans leurs maladies aux frais de la communaut6, 



358 B00K IV - CHAPTER VII. §6. 

predominate, is not that which can exist between a capital- 
ist as chief, and workpeople without a voice in the manage- 
ment, but the association of the labourers themselves on 
terms of equality, collectively owning the capital with which 
they carry on their operations, and working under managers 

et de recevoir 1 fr. 50 cent, de salaire par jour d'incapaeite de travail. Les 
ouvriers ne peuvent retirer leur part dans les benefices que quand ils sortent de 
l'association. Chaque annee, cette part, qui est representee tant en materiel 
qu'en rentes sur l'Etat, s'augmente par la capitalisation des interets, et cree ainsi 
une reserve a l'ouvrier. 

" M. Dupont et les capitalistes, ses commanditaires, trouvent dans cette asso- 
ciation un profit bien superieur a celui qu'ils auraient ; les ouvriers, de leur cote, 
se felicitent chaque jour de l'heureuse idee de leur patron. Plusieurs d'entre 
eux, encourages a la reussite de l'Etablissement, lui ont fait obtenir une medaille 
d'or en 1849, une medaille d'honneur a l'Exposition Universelle de 1855; et 
quelques uns meme ont recu personellement la recompense de leurs decouvertes 
et de leurs travaux. Chez un patron ordinaire, ces braves gens n'auraient pas 
eu le loisir de poursuivre leurs inventions, a, moins que d'en laisser tout Fhon- 
neur a celui qui n'en etait pas l'auteur : tandis qu'etant associes, si le patron eut 
ete injuste, deux cents hommes eussent fait redresser ses torts. 

" J'ai visite moi-meme cet etablissement, et j'ai pu m'assurer du perfection- 
nement que cette association apporte aux habitudes des ouvriers. 

" M. Gisquet, ancien prefet de police, est proprietaire depuis long-temps 
d'une fabrique d'huile a Saint-Denis, qui est la plus importante de France, apres 
celle de M. Darblay, de Corbeil. Lorsqu'en 1848 il prit le parti de la dinger lui- 
meme, il rencontra des ouvriers habitues a s'enivrer plusieurs fois par semaine, 
et qui, pendant le travail, chantaient, fumaient, et quelquefois se disputaient. 
On avait maintes fois essay6 sans succes de changer cet etat de choses : il y par- 
vint par la prohibition faite a tous ses ouvriers de s'enivrer les jours de travail, 
sous peine d'exclusion, et par la promesse de partager entre eux, a titre de 
gratification annuelle, 5 p. 100 de ses benefices nets, au pro rata des salaires, 
qui, du reste, sont fixes aux prix courants. Depuis ce moment, la reforme a ete 
complete: il se voit entoure d'une centaine d'ouvriers pleins de zele et de 
devouement. Leur bien-etre s'est accru de tout ce qu'ils ne depensent pas en 
boissons, et de ce qu'ils gagnent par leur exactitude au travail. La gratification 
que M. Gisquet leur accorde, leur a valu, en moyenne, chaque annee, 1'equivalent 
de leur salaire pendant six semaines. . . . . 

"M. Beslay, ancien depute de 1830 a 1839, et representant du peuple a 
l'Assemblee Constituante, a fonde un atelier important de machines a vapeur a 
Paris, dans le Faubourg du Temple. II eut l'idee d'associer dans ce dernier 
Etablissement ses ouvriers, des le commencement de 184V. Je transcris ici cet 
acte d'association, que l'on peut regarder comme l'un des plus complets de tous 
ceux faits entre patrons et ouvriers." 

The practical sagacity of Chinese emigrants long ago suggested to them, ao- 



FROBABLE FUTURE OF THE LABOURING CLASSES. 350 

elected and removable by themselves. So long as this idea 
remained in a state of theory, in the writings of Owen or of 
Louis Blanc, it may have appeared, to the common modes of 
judgment, incapable of being realized, and not likely to be 
tried unless by seizing on the existing capital, and confiscat- 
ing it for the benefit of the labourers ; which is even now 
imagined by many persons, and pretended by more, both in 
England and on the Continent, to be the meaning and pur- 
pose of Socialism. But there is a capacity of exertion and 
self-denial in the masses of mankind, which is never known 
but on the rare occasions on which it is appealed to in the 
name of some great idea or elevated sentiment. Such an 
appeal was made by the French Revolution of 1848. For 
the first time it then seemed to the intelligent and generous 
of the working classes of a great nation, that they had 
obtained a government who sincerely desired the freedom 
and dignity of the many, and who did not look upon it as 
their natural and legitimate state to be instruments of pro- 
duction, worked for the benefit of the possessors of capital. 
Under this encourgement, the ideas sown by Socialist 
writers, of an emancipation of labour to be effected by 
means of association, throve and fructified ; and many 
working people came to the resolution, not only that they 
would work for one another, instead of working for a master 
tradesman or manufacturer, but that they would also free 



cording to the report of a recent visitor to Manilla, a similar constitution of the 
relation between an employer and labourers. "In these Chinese shops" (at 
Manilla) " the owner usually engages all the activity of his countrymen employed 
by him in them, by giving each of them a share in the profits of the concern, or 
in fact by making them all small partners in the business, of which he of course 
takes care to retain the lion's share, so that while doing good for him by man- 
aping it well, they are also benefiting themselves. To such an extent is this prin- 
ciple carried that it is usual to give even their coolies a share in the profits of 
the business in lieu of fixed wages, and the plan appears to suit their temper 
well ; for although they are in general most complete eye-servants when working 
for a fixed wage, they are found to be most industrious and useful ones when 
interested even for the smallest share." — McMicking's Recollections of Manilla 
and the Philippines during 1848, 1849, and 1850, p 24, 



360 BOOK IV - CHAPTER VII. §6. 

themselves, at whatever cost of labour or privation, from 
the necessity of paying, out of the produce of their industry, 
a heavy tribute for the use of capital ; that they would 
extinguish this tax, not by robbing the capitalists of what 
they or their predecessors had acquired by labour and pre- 
served by economy, but by honestly acquiring capital for 
themselves. If only a few operatives had attempted this 
arduous task, or if, while many attempted it, a few only had 
succeeded, their success might have been deemed to furnish 
no argument for their system as a permanent mode of indus- 
trial organization. But, excluding all the instances of fail- 
ure, there exist, or existed a short time ago, upwards of a 
hundred successful, and many eminently prosperous, asso- 
ciations of operatives in Paris alone, besides a considerable 
number in the departments. An instructive sketch of their 
history and principles has been published, under the title 
of " L' Association Ouvriere Industrielle et Agricole, par H. 
Feugueray :" and as it is frequently affirmed in English news- 
papers that the associations at Paris have failed, by writers 
who appear to mistake the predictions of their enemies at 
their first formation for the testimonies of subsequent expe- 
rience, I think it important to show by quotations from M. 
Feugueray's volume, strengthened by still later testimonies, 
that these representations are not only wide of the truth, 
but the extreme contrary of it. 

The capital of most of the associations was originally 
confined to the few tools belonging to the founders, and the 
small sums which could be collected from their savings, or 
which were lent to them by other workpeople as poor as 
themselves. In some cases, however, loans of capital were 
made to them by the republican government : but the asso- 
ciations which obtained these advances, or at least which 
obtained them before they had already achieved success, are, 
it appears, in general by no means the most prosperous. 
The most striking instances of prosperity are in the case of 
those who have had nothing to rely on but their own slen- 
der means and the small loans of fellow-workmen, and who 



PROBABLE FUTURE OF THE LABOURING CLASSES. 361 

lived on bread and water while they devoted the whole 
surplus of their gains to the formation of a capital. " Sou- 
vent," says M. Feugueray,* " la caisse etait tout-a-fait vide, 
et il n'y avait pas de salaire du tout. Et puis la vente ne 
marchait pas, les rentrees se faisaient attendre, les valeurs 
ne s'escomptaient pas, le magasin des matieres premieres 
etait vide ; et il fallait se priver, se restreindre dans toutes 
ses depenses, se reduire quelquefois au pain et a 1'eau .... 
C'est au prix de ces angoisses et de ces miseres, c'est par 
cette voie douloureuse, que des homines, sans presque 
aueune autre ressource au debut que leur bonne volonte et 
leurs bras, sont parvenus a se former une clientele, a 
acquerir un credit, a se creer enfin un capital social, et a 
fonder ainsi des associations dont l'avenir aujourd'hui sem- 
ble assure." 

I will quote at length the remarkable history of one of 
these associations.f 

" La necessite d'un puissant capital pour l'etablissement 
d'une fabrique de pianos etait si bien reconnue dans la cor- 
poration, qu'en ISiS les delegues de plusieurs centaines 
d'ouvriers, qui s'etaient reunis pour la formation d'unegrande 
association, demanderent en son nom au gouvernement une 
subvention de 300,000 fr., e'est-a-dire la dixieme partie du 
fumls total vote par l'Assemblee Constituante. Je me 
souviens d'avoir fait, en qualite de membre de la commission 
chargee de distribuer ces fonds, des efforts inutiles pour 
convaincre les deux delegnes avec qui la commission etait 
en rapport, que leur demande etait exorbitante. Toutes 
mes instances resterent sans succes ; je prolongeai vainement 
la conference pendant pres de deux heures. Les deux 
delegues me repondirent imperturbablement que leui 
industrie etait dans une condition speciale ; que l'association 
ne pouvait s'y etablir avec chance de reussite que sur une 
tres grande eehelle et avec un capital considerable, et que 
la somme de 300,000 fr. etait un minimum au-dessous du- 

* P. 112, f Pp. 113-6. 



362 B00K IV - CHAPTER VII. §6. 

quel ils ne pouvaient descendre ; bref, qu'ils ne pouvaient 
pas reduire leur demande d'un sou. La commission re- 
fusa. 

" Or, apres ce refus, et le projet de la grande association 
etant abandonne, voici ce qui arriva: c'est que quatorze 
ouvriers, et il est assez singulier que parmi eux se soil 
trouve l'un des deux delegues, se resolurent a fonder entre 
eux une association pour la fabrique des pianos. Le 
projet etait au moins temeraire de la part d'bommes qui 
n'avaient ni argent ni credit ; mais la foi ne raisonne pas, 
elle agit. 

" Nos quatorze hommes se mirent done a l'ceuvre, et voici 
le recit de leurs premiers travaux, que j'emprunte a un article 
du National, tres bien redige par M. Cochut, et dont je me 
plais a attester l'exactitude. 

" Quelques-uns d' entre eux, qui avaient travaille a leur 
propre compte, apporterent, tant en outils qu'en materiaux, 
une valeur d'environ 2000 fr. II fallait, en outre, un fonds 
de roulement. Chacun des societaires opera, non sans peine, 
un versement de 10 fr. Un certain nombre d'ouvriers, non 
interesses dans la societe, firent acte d'adhesion, en apportant 
de faibles offrandes. Bref, le 10 mars 1849, une somme de 
229 fr. 50 cent, ayant ete realisee, l'association fut declaree 
constitute. 

" Ce fonds social n' etait pas m^me suffisant pour l'instal- 
lation, et pour les menues depenses qu'entraine au jour le 
jour le service d'un atelier. Kien ne restant pour les 
salaires, il se passa pres de deux mois sans que les tra- 
vailleurs touchassent un centime. Comment vecurent-ils 
pendant cette crise ? Comme vivent les ouvriers pendant 
le chomage, en partageant la ration du camarade qui travaille, 
en vendant ou en engageant piece a piece le peu d'effets 
qu'on possede. 

" On avait execute quelques travaux. On en toucha le 
prix le 4 mai 1849. Ce jour fut pour l'association ce qu'est 
une victoire a l'entree d'une campagne : aussi voulut-on le 



PROBABLE FUTURE OF THE LABOURING CLASSES. 363 

celebrer. Toutes les dettes exigibles etant payees, le divi- 
dende dechaque societaire s'elevait a 6 fr. 61 cent. On 
convint d'attribuer a chacun 5 fr. a valoir sur son salaire, et 
de consacrer le surplus a un repas fraternel. Les quatorze 
societaires, dont la plupart n'avaient pas bu de vin depuis 
un an, se reunirent, avec leurs femmes et leurs enfants. On 
depensa 32 sous par menage. On parle encore de eette 
journee, dans les ateliers, avec une emotion qu'il est difficile 
de ne pas partager. 

" Pendant un mois encore, il fallut se contenter d'une paie 
de 5 fr. par semaine. Dans le courant de juin, un boulanger, 
melomane ou speculateur, offrit d'acheter un piano payable 
en pain. On fit marche au prix de 480 fr. Ce fut une bonne 
fortune pour l'association. On eut du moins l'indispensable. 
On ne voulut pas evaluer le pain dans le compte des salaires. 
Chacun mangea selon son appetit, ou pour mieux dire, 
selon l'appetit de sa famille ; car les societaires maries 
furent autorises a emporter du pain pour leurs femmes et 
leurs enfants. 

" Cependant l'association, composee d'ouvriers excel- 
lents, surmontait peu a peu les obstacles et les privations 
qui avaient entrave ses debuts. Ses livres de caisse offrent 
les meilleurs temoignages des progres que ses instruments ont 
faits dans l'estime des acheteurs. A partir du mois d'aout 
1849, on voit le contingent hebdomadaire s'elever a 10, a 15, 
a 20 fr. par semaine ; mais cette derniere somme ne represente 
pas tous les benefices, et ehaque associe a laisse a la masse 
beaucoup plus qu'il n'a touche. 

" Ce n'est pas, en effet, par la somme que touche ehaque 
semaine le societaire, qu'il faut apprecier sa situation. 
mais par la part de propriete acquise dans un etablisse- 
ment deja considerable. Yoici l'etat de situation de l'asso- 
ciation, tel que je l'ai releve sur l'inventaire du 30 decembre 
1850. 

" A cette epoque, les associes sont au nombre de trente- 
deux. De vastes ateliers ou magasins, loues 2000 fr., ne 
leur suffisent plus. 



364 BOOK IV. CHAPTER VII. § 6. 

France. Centimes, 

Independamment de l'outillage, evalue a 5,922 60 
lis possedent en marchandises, et sur- 
toat en matieres premieres, une va- 

leur de 22,972 28 

lis ont en caisse 1,021 10 

Leurs effets en portefeuille montent a „ . 3,540 

Le compte des debiteurs s'eleve a* . . . 5,861 90 

L'actif social est done en totalite de . . 39,317 88 

Sur ce total, il n'est du que 4,737 fr. 86 c. 
a des creaneiers, et 1,650 fr. a quatre- 
vingts adherents ;f ensemble . . . 6,387 86 

Eestent 32,930 2 

formant l'actif reel, comprenant le capital indivisible et le 
capital de reserve des soeietaires. L'association, a la meme 
epoqne, avait soixante-seize pianos en construction, et ne pou- 
vait fournir a toutes les demandes." 

From a later report we learn that this society subsequently 
divided itself into two separate associations, one of which, 
in 1854, already possessed a circulating capital of 56,000 
francs.^ 

* " Ces deux derniers articles ne comprennent que de tres bonnes valeurs, 
qui, presque toutes, ont ete soldees depuis." 

f " Ces adherents sont des ouvriers du metier qui ont commandite l'associa- 
tion dans ses debuts : une partie d'entre eux a ete remboursee depuis le com- 
mencement de 1851. Le compte des creaneiers a aussi beaucoup diminue ; au 
23 Avril, il ne s'elevait qu'a 1113 fr. 59 c." 

\ Article by M. Cherbuliez on Les Associations Ouorieres, in the Journal 
des Economistes for November 1860. 

I subjoin, from M. Villiaume and M. Cherbuliez, detailed particulars of other 
sminently successful experiments by associated workpeople. 

"Nous citerons en premiere ligne," says M. Cherbuliez, "comme ayant 
atteint son but et presentant un resultat definitif, 1' Association Remquet, de la 
Rue Garanciere, a Paris, dont le fondateur etait, en 1848, prote dans l'imprimerie 
Renouard. Cette maison ayant ete forcee de liquider ses affaires, il proposa 
aux autres ouvriers de s'associer avec lui et de continuer l'entreprise pour leur 
piopre compte, en demandant une subvention pour couvrir le prix d'achat et les 
premieres avarces. Quinze ouvriers accepterent cette proposition, et forraerent 
une societe en nom sollectif, dont les statuts fixaient le salaire de chaque espfece 



PROBABLE FUTURE OF THE LABOURING CLASSES. 365 

The same admirable qualities by which the associations 
were carried 'through their earl j struggles, maintaiued them 
in their increasing prosperity. Their rules of discipline, 

de travail et pourvoyaient a la formation graduelle du capital d'exploitation par 
un prelevement de 25 pour 100 sur tous les salaires, prelevement qui ue devait 
donner aucun dividende et aucun interet jusqu'i l'expiration des dix annees que 
devait durer la societe. Reinquet demanda et obtint pour lui la direction ab- 
solue de l'entreprise, avec un salaire fixe ties niodere. A la liquidation defini- 
tive, le benefice total devait se partager entre tous les associes, au pro rata de 
leur quote-part dans le fonds, c'est-a-dire, du travail que chacun aurait fourni. 
Une subvention de 80,000 francs fut accordee par l'Etat, non sans beaucoup de 
difficulte, et a des conditions tres onereuses. En depit de ces conditions, et 
malgre les circonstances defavorables qui lesulterent de la situation politique du 
pays, l'Association Remquet a si bien prospere, qu elle s'est trouvee, a l'epoque 
de la liquidation, et apres avoir renibourse la subvention de l'Etat, en possession 
d'un capital net de 155,000 francs, dont le partage a produit en moyenne, 
10,000 a 11,000 francs pour chaque associe: 7,000 en minimum, 18,000 en max- 
imum." 

" La Societe Fraternelle des Ouvriers Ferblantiers et Lampistes avait ete 
londee des le mois de mars 1858, par 500 ouvriers, comprenant la presque 
totalite de ceux qui appartenaient alors a cette branche d'industrie. Ce premier 
essai, inspire par des idees excentriques et inapplicables, n'ayant pas survecu 
aux fatales journees de juin, une nouvelle association se forma, apres le reta- 
blissement de l'ordre, sur des proportions plus modestes. Composee d'abord de 
quarante membres, elle entreprit ses affaires, en 1849, avec un capital forme par 
les cotisations de ses membres, sans demander aucune subvention. Apres 
diverses peripeties, qui reduisirent a trois le nombre des associes, puis le ramc- 
nerent a quatorze, et le firent de nouveau retomber a trois, elle finit pouitant 
par se consolider entre quarante-six membres, qui reformerent paisiblement leurs 
statuts dans les points que 1'experience avait signales comme vicieux, et qui, leur 
nombre s'etant eleve jusqu'a 100 par des recrutements successifs, se trouverent, 
des l'annee 1858, en possession d'un avoir de 50,000 francs, et en etat de se par- 
tager annuellement un dividende de 20,000 francs. 

" L'association des ouvriers bijoutiers eu dore, la plus ancienne de toutes, 
s'etait formee des l'annee 1831, de huit ouvriers, avec un capital de 200 francs 
provenant de leurs epargnes reunies. Une subvention de 24,000 francs lui per- 
mit, en 1849, d'etendre beaucoup ses affaires, dont le chiffre annuel s'elevait 
deja, en 1858, a 140,000 francs, et assurait a chaque associe un dividende egal 
au double de leur salaire." 

The following are from M. Villiaume : — 

" Apres les journees de juin 1848, le travail £tait suspendu dans le faubourg 
Saint- Antoine, occupe surtout, comme on le sait, par les fabricants de meubles. 
Quelques menuisiers en fauteuils firent un appel a ceux qui seraient disposes i 
travailler ensemble. Sur six a sept cents de cette profession, quatre cents se 



366 BOOK IV. CHAPTER VII. §6. 

instead of being more lax, are stricter than those of ordinary 
workshops ; but being rules self-imposed, for the manifest 
good of the community, and not for the convenience of an 
employer regarded as having an opposite interest, they are 
far more scrupulously obeyed, and the voluntary obedience 
carries with it a sense of personal worth and dignity. "With 
wonderful rapidity the associated work-people have learnt to 
correct those of the ideas they set out with, which are in 
opposition to the teaching of reason and experience. Almost 



firent inscrire. Mais comme le capital manquait, neuf hommes des plus zeles 
commencerent l'association avec tout ce qu'ils possedaient; savoir, une valeur 
de 369 francs en outils, et 135 francs 20 centimes en argent. 

" Leur bon gout, leur loyaute et l'exactitude de leurs fournitures augmentant 
leurs debouches, les associes furent bientot au nombre de cent huit. lis recu- 
rent de l'Etat une avance de 25 mille francs, remboursables en quatorze ans par 
annuite, a raison de 3 fr. 75 c. pour cent d'interet. 

"En 1857, le nombre des associes est de soixante-cinq, celui des auxiliaires 
de cent en moyenne. Tous les associes votent pour l'election d'un conseil d'ad- 
ministration de huit membres, et d'un gerant, dont le nom represente la raison 
sociale. La distribution et la surveillance du travail dans les ateliers sont con- 
fiees a des contremaitres choisis par le gerant et le conseil. II y a un contre- 
maitre pour vingt ou vingt-cinq hommes. 

"Le travail est paye aux pieces, suivant les tarifs arretes en assemblee 
generate. Le salaire peut varier entre 3 et 7 francs par jour, selon le zele et 
l'habilete de l'ouvrier. La moyenne est de 50 francs par quinzaine. Ceux qui 
gagnent le moins touchent pres de 40 francs par quinzaine. Un grand nombre 
gagnent 80 francs. Des sculpteurs et mouluriers gagnent jusqu'a 100 francs, 
soit 200 francs par mois. Chacun s'engage a fournir cent-vingt heures par quin- 
zaine, soit dix heures par jour. Aux termes du reglement chaque heure de 
deficit soumet le delinquant a une amende de 10 centimes par heure en-deca de 
trente heures, et de 15 centimes au-dela. Cette disposition avait pour objet 
d'abolir 1'habitude du lundi, et elle a produit son effet. Depuis deux ans, le 
systeme des amendes est tombe en desuetude, a cause de la bonne conduite des 
associes. 

"Quoique Tapport des associes n'ait ete que de 369 francs, le materiel d'ex- 
ploitation appartenant a l'etablissement* s'elevait deja, en 1851, k 5713 francs 
et l'avoir social, y compris les creances, a 24,000 francs. Depuis lors cette 
association est devenue plus florissante, ayant resiste a tous les obstacles qui lui 
ont ete suscites. Cette maison est la plus forte de Paris dans son genre, ct la 



II eat situ6 dans la rue de Chavonne, cour Saint-Joseph, au faubourg Saint- Antoine. 



PROBABLE FUTURE OF THE LABOURING CLASSES. 367 

all the associations, at first, excluded piecework, and gave 
equal wages whether the work done was more or less. 
Almost all have abandoned this system, and after allowing 



plus consideree. Elle fait des affaires pour 400 mille francs par an. Voici son 
inventaire de decembre 1855. 

Actif. 

EspSces 445 70 

Marchandises 82,930 " fait d'avance, ce qui empeche le 

chomage. 

Salaires payes d'avance . . . 2,421 70 

Materiel 20,891 35 

Portefeuille 9,711 75 

Meubles consignes. . . . 211 " 

Lover d'avance 4,933 10 

Debiteurs divers 48,286 95 

169,831 55 

Passif. 

Effets a payer 8,655 

Fonds d'association 133 

100 fr. a chacun 7,600 ne la doivent qu'a eux-memes. 

Fonds de retenue indivisible . . 9,205 84 pour l'Etat, qui prend 10 p. 100 

par an sur les benefices, le tout 
payable au bout de 14 ans. 

Caisse de secours 1,544 30 ne la doivent qu'a eux-memes. 

Pret de l'Etat, principal et inte>et 27,053 " 
Creanciers divers 12,559 51 

66,752 65 

Difference active. 

100,398 90. La societe possede en realite 123,000 fr." 

But the most important association of all is that of the Masons : — 

" L'association des macons fut fondee le 10 aoiit 1848. Elle a son siege rue 

Saint-Victor, 155. Le nombre de ces membres est de 85, et celui de ses auxil- 

iaires de trois a quatre cents. Elle a deux gerants a sa tete ; l'un, charge 

specialement des constructions ; l'autre, de l'administration. Les deux gerants 

passent pour les plus habiles entrepreneurs de maconnerie de Paris, et ils se con- 

tentent d'un modeste traitement. Cette association vicnt de construire trois ou 

quatre des plus remarquables hotels de la capitale. Bien qu'elle travaille avec 

plus d'economie que les entrepreneurs ordinaircs, comme on ne la rembourse 

qu'a des termes eloignes, c'est surtout pour elle qu'une banque serait necessaire, 

car elle a des avances considerables a faire. Neanmoins elle prospere, et la 

preure en est dans le dividende de 56 pour 100 qu'a produit cette annee son 



368 BOOK IV. CHAPTER VII. §6. 

to every one a fixed minimum, sufficient for subsistence, 
they apportion all further remuneration according to the 
work done : most of them even dividing the profits 

propre capital, et qu'elle a paye aux citoyens qui se sont associes a ses opera- 
tions. 

" Cette association est formee d'ouvriers qui n'apportent que leur travail ; 
d'autres qui apportent leur travail et un capital quelconque ; enfin de citoyens 
qui ne travaillent point, mais qui se sont associes en fournissant un capital. 

" Les macons se livrent le soir a un enseignement mutuel. Chez eux, 
comme chez les fabricants de fauteuils, le malade est soigne aux frais de la 
societe, et recoit en outre un salaire durant sa maladie. Chacun est protege par 
l'association dans tous les actes de sa vie. Les fabricants de fauteuils aurout 
bientot chacun un capital de deux ou trois mille francs a leur disposition, soit 
pour doter leurs filles, soit pour commencer une reserve pour l'avenir. Quant 
aux macons, quelques-uns possedent deja 4000 francs d'epargnes qui restent au 
fonds social. 

" Avant qu'ils fussent associes, ces ouvriers etaient pauvrement vetus de la 
veste et de la blouse ; parce que, faute de prevoyance, et surtout a cause du 
chomage, ils n'avaient jamais une somme disponible de 60 francs pour acheter 
une redingote. Aujourd'hui, la plupart sont vetus aussi bien que les bourgeois; 
quelquefois meme avec plus de gout. Cela tient a ce que 1'ouvrier, ayant un 
credit dans son association, trouve partout ce dont il a besoin sur un bon qu'il 
souscrit; et la caisse retient chaque quinzaine une partie de la somme a eteindre. 
De la sorte, l'epargne se fait, pour ainsi dire, malgre 1'ouvrier. Plusieurs meme, 
n'ayant plus de dettes, se souscrivent a eux-memes des bons de 100 francs paya- 
bles en cinq mois, afin'de resister a la tentation des depenses inutiles. On leur 
retient 10 francs par quinzaine ; et au bout des cinq mois, bon gre, mal gre, ils 
trouvent ce petit capital epargne." 

The following table, taken by M. Cherbuliez from a work (Die gewerblichen 
und wirthschaftlichen Genossenschaften der arbeitenden Classen in England, 
Fvankreich mid Deutschland) published at Tubingen in 1860 by Professor 
Huber (one of the most ardent and high-principled apostles of this kind of co- 
operation), shows the rapidly progressive growth in prosperity of the Masons' 
Association up to 1858: — 

Amount of Profits 

Tear. business done. realized. 

fr. fr. 

1852 . 45,530 ... 1,000 

1853 297,20S ... 7,000 

1854 344,240 ... 20,000 

1855 614,694 ... 46,000 

1856 998,240 ... 80,000 

1857 1,330,000 ... 100,000 

1858 1,231,461 ... 130,000 

"Sur ce dernier dividende," adds M. Cherbuliez, "30,000 francs ont 6ie 



PROBABLE FUTURE OF THE LABOURING CLASSES. 309 

at the end of the year, in the same proportion as the 
earnings.* 

It is the declared principle of most of these associations, 
that they do not exist for the mere private benefit of the indi- 
vidual members, but for the promotion of the co-operative 
cause. With every extension, therefore, of their business, 
they take in additional members, not to receive wages from 
them as hired labourers, but to enter at once into the full 
benefits of the association, without being required to bring 
anything in, except their labour : the only condition imposed 
is that of receiving during a few years a smaller share in the 
annual division of profits, as some equivalent for the sacri- 

prelev6s pour le fonds de reserve, et les 100,000 francs restant, partages entre 
les associes, ont donne pour chacun de 500 k 1500 francs, outre leur salaire, et 
leur part dans la propriete commune en iinmeubles et en materiel d'exploita- 
tion." 

Of the management of the associations generally, M. Yilliaume says, " J'ai 
pu me convaincre par moi-meme de l'habilete des gerants et des conseils d'ad- 
mimstration des associations ouvrieres. Ces gerants sont bien superieurs pour 
l'intelligence, le zele, et meme pour la politesse, h la plupart des patrons ou 
entrepreneurs particuliers. Et chez les ouvriers associes, les funestes habitudes 
d'intemperance disparaissent peu a peu, avec la grossierete et la rudesse qui sont 
la consequence de la trop incomplete education de leur classe." 

* Even the association founded by M. Louis Blanc, that of the tailors of 
Clichy, after eighteen months trial of his system, adopted piece-work. One of 
• the reasons given by them for abandoning the original system is well worth ex- 
tracting. "En outre des vices dont j'ai parle, les taillcurs lui reprochaient 
d'engendrer sans cesse des discussions, des querclles, a cause de l'interfit.que 
chacun avait a faire travailler ses voisins. La surveillance ruutuelle de 1'atelier 
degenerait ainsi en un esclavage veritable, qui ne laissait a personne la liberie de 
son temps et de ses actions. Ces dissensions ont disparu par l'introduction du 
travail aux pieces." Feugueray, p. 88. One of the most discreditable indica- 
tions of a low moral condition given of late by the English working classes, is 
the opposition to piece-work. When the payment per piece is not sufficiently 
high, that is a just ground of objection. But dislike to piece-work in itself, ex- 
cept under mistaken notions, must be dislike to justice and fairness; a desire to 
cheat, by not giving work in proportion to pay. Piece-work is the perfection 
of contract ; and contract, in all work, and in the most minute detail — the prin- 
ciple of so much pay for so much service, carried out to the utmost extremity — 
is the system, of all others, in the present state of society and degree of civiliza- 
tion, most favourable to the worker; though most unfavourable to the non- 
worker who wisb.es to be paid for being idle. 
GO 



370 BOOK IV. CHAPTER VII. §6. 

fices of the founders. When members quit the association, 
which they are always at liberty to do, they carry none of 
the capital with them : it remains an indivisible property, of 
which the members for the time being have the use, but not 
the arbitrary disposal : by the stipulations of most of the con- 
tracts, even if the association breaks up, the capital cannot 
be divided, but must be devoted entire to some work of 
beneficence or of public utility. A fixed, and generally a 
considerable, proportion of the annual profits, is not shared 
among the members, but added to the capital of the associ- 
ation, or devoted to the repayment of advances previously 
made to it : another portion is set aside to provide for the 
sick and disabled, and another to form a fund for extending 
the practice of association, or aiding other associations in 
their need. The managers are paid, like other members, 
for the time which is occupied in management, usually at 
the rate of the highest paid labour : but the rule is adhered 
to, that the exercise of power shall never be an occasion of 
profit. 

Of the ability of the associations to compete successfully 
with individual capitalists, even at an early period of their 
existence, M. Feugueray* said, " Les associations qui ont 
ete fondees depuis deux annees, avaient bien des obstacles a 
vaincre; la plupart manquaient presque absolument de 
capital ; toutes marchaient dans une voie encore inexploree ; 
elles bravaient les perils qui menacent toujours les novateurs 
et les debutants. Et neanmoins, dans beau coup d'industries 
ou elles se sont etablies, elles constituent deja pour les 
anciennes maisons une rivalite redoutable, qui suscite m&ne 
des plaintes nombreuses dans une partie de la bourgeoisie, 
non pas seulement chez les traiteurs, les limonadiers et les 
coiffeurs, c'est-a dire dans les industries ou la nature des 
produits permet aux associations de compter sur la clientele 
democratique, mais dans d'autres industries ou elles n'ont 
pas les memes avantages. On n'a qu'a consulter par ex- 
emple les fabricants de fauteuils, de chaises, de limes, et 

* Pp. 31-8. 



PROBABLE FUTURE OF THE LABOURING CLASSES. 371 

l'on saura d'eux si les etablissements les plus iinportants en 
leurs genres de fabrication ne sont pas les etablissements 
des associes." 

The vitality of these associations must indeed be great, to 
have enabled about twenty of them to survive not only the 
anti-socialist reaction, which for the time discredited all at- 
tempts to enable workpeople to be their own employers — 
not only the tracasserles of the police, and the hostile policy 
of the government since the usurpation — but in addition to 
these obstacles, all the difficulties arising from the trying 
condition of financial and commercial affairs from 1854 to 
1858. Of the prosperity attained by some of them even 
while passing through this difficult period, I have given 
examples which must be conclusive to all minds as to the 
brilliant future reserved for the principle of co-operation. 

It is not in France alone that these associations have 
commenced a career of prosperity. To say nothing at pres- 
ent of Piedmont or of Germany, England can produce cases 
of success rivalling even those which I have cited from 
France. Under the impulse commenced by Mr. Owen, and 
more recently propagated by the writings and personal 
efforts of a band of friends, chiefly clergymen and barristers, 
to whose noble exertions too much praise can scarcely be 
given, the good seed was widely sown ; the necessary alter- 
ations in the English law of partnership were obtained from 
Parliament, on the benevolent and public-spirited initiative 
of Mr. Slaney ; many industrial associations, and a still 
greater number of co-operative stores for retail purchases, 
were founded. Among these are already many instances of 
remarkable prosperity, the most signal of which are the 
Leeds Flour Mill, and the Rochdale Society of Equitable 
Pioneers. Of this last association, the most successful of all, 
the history has been written in a very interesting manner 
by Mr. Holyoake ;* and the notoriety which by this and 
other means has been given to facts so encouraging, is caus- 

* Self-help by the People — History of Co-operation in Rochdale. 



372 B0 °K IV. CHAPTER VII. §6. 

ing a rapid extension of associations with similar objects in 
Lancashire and Yorkshire. 

The original capital of the Rochdale Society consisted 
of 281., brought together by the unassisted economy of about 
forty labourers, through the slow process of a subscription 
of twopence (afterwards raised to threepence) per week. 
With this sum they established in 1844 a small shop, or 
store, for the supply of a few common articles for the con- 
sumption of their own families. As their carefulness and 
honesty brought them an increase of customers and of 
subscribers, they extended their operations to a greater 
number of articles of consumption, and in a few years 
were able to make a large investment in shares of a Co- 
operative Corn Mill. Mr. Holyoake thus relates the stages 
of their progress up to 1857. 

" The Equitable Pioneer's Society is divided into seven 
departments : Grocery, Drapery, Butchering, Shoemaking, 
Clogging, Tailoring, "Wholesale. 

" A separate account is kept of each business, and a 
general account is given each quarter, showing the position 
of the whole. 

" The grocery business was commenced as we have 
related, in December 1844, with only four articles to sell. 
It now includes whatever a grocer's shop should include. 

" The drapery business was started in 1847, with an 
humble array of attractions. In 1854 it was erected into 
a separate department. 

" A year earlier, 1846, the Store began to sell butchers' 
meat, buying eighty or one hundred pounds of a tradesman 
in the town. After a while, the sales were discontinued 
until 1850, when the Society had a warehouse of its own. 
Mr. John Moorhouse, who has now two assistants, buys and 
kills for the Society three oxen, eight sheep, sundry porkers 
and calves, which are on the average converted into 1301. 
of cash per week. 

" Shoemaking commenced in 1852. Three men and an 
apprentice make, and a stock is kept on sale. 



PROBABLE FUTURE OF THE LABOURING CLASSES. 373 

" Clogging and tailoring commenced also in this year. 

" The wholesale department commenced in 1852, and 
marks an important development of the Pioneers'' proceed- 
ings. This department has been created for supplying any 
members requiring large quantities, and with a view to 
supply the co-operative stores of Lancashire and Yorkshire, 
whose small capitals do not enable them to buy in the best 
markets, nor command the services of what is otherwise 
indispensable to every store — a good binj< r, who knows the 
markets and his business, who knows what, how, and 
where to buy. The wholesale department guarantees 
purity, quality, fair prices, standard weight and measure, 
but all on the never-failing principle, cash payment. "' 

In consequence of the number of members who now 
reside at a distance, and the difficulty of serving the great 
increase of customers, " Branch stores have been opened. 
In 1856, the first Branch was opened, in the Oldham Road, 
about a mile from the centre of Rochdale. In 1857 the 
Castleton Branch, and another in the Whitworth Road, 
were established, and a fourth Branch in Pinfold." 

The warehouse, of which their original Store was a 
single apartment, was taken on lease by the Society, very 
much out of repair, in 1819. " Every part has undergone 
neat refitting and modest decoration, and now wears the air 
of a thoroughly respectable place of business. One room is 
now handsomely fitted up as a newsroom. Another is 

neatly fitted up as a library Their newsroom is as 

well supplied as that of a London club." It is now " free 
to members, and supported from the Education Fund,"' a 
fund consisting of 2^ per cent of all the profits divided, 
which is set apart for educational purposes. " The Library 
contains 2200 volumes of the best, and among them, many 
of the most expensive books published. The Library is 
free. From 1850 to 1855, a phool for young persons was 
conducted at a charge of twopence per month. Since 1855, 
a room has been granted by the Board for the use of from 



374 BOOK IV. CHAPTER VII. §6. 

twenty to thirty persons, from the ages of fourteen to forty 
for mutual instruction on Sundays and Tuesdays. . . . 

" The corn-mill was of course rented, and stood at Small 
Bridge, some distance from the town — one mile and a half. 
The Society have since built in the town an entirely new 
mill for themselves. The engine and the machinery are of 
the most substantial and improved kind. The capital 
invested in the corn-mill is 8,4:501. of which 3,7311. 15.<?. 2d. 
is subscribed by the Equitable Pioneers' Society. The 
corn-mill employs eleven men." 

At a later period they extended their operations to the 
staple manufacture itself. From the success of the Pioneers' 
Society grew not only the co-operative corn-mill, but a co- 
operative association for cotton and woollen manufacturing. 
" The capital in this department is 4000Z., of which sum 
2042Z. has been subscribed by the Equitable Pioneers' 
Society. This Manufacturing Society has ninety-six power 
looms at work, and employs twenty-six men, seven women, 
four boys, and five girls — in all forty-two persons " 

" In 1853 the Store purchased for 745Z., a warehouse 
(free-hold) on the opposite side of the street, where they 
keep and retail their stores of flour, butcher's meat, pota- 
toes, and kindred articles. Their committee-rooms and 
offices are fitted up in the same building. They rent other 
houses adjoining for calico and hosiery and shoe stores. In 
their wilderness of rooms, the visitor stumbles upon shoe- 
makers and tailors, at work under healthy conditions, and 
in perfect peace of mind as to the result on Saturday night. 
Their warehouses are everywhere as bountifully stocked as 
Noah's Ark, and cheerful customers literally crowd Toad 
Lane at night, swarming like bees to every counter. The 
industrial districts of England have not such another sight as 
the Rochdale Co-operative Store on Saturday night."* 



* " But it is not," adds Mr. Holyoake, " the brilliancy of commercial activity 
in which either writer or reader will take the deepest interest ; it is in the new 
and improved spirit animating this intercourse of trade. Buyer and seller meet 
as friends ; there is no overreaching on one side, and no suspicion on the other. 



PROBABLE FUTURE OF THE LABOURING CLASSES. 375 

Since the disgraceful failure of the Rochdale Savings Bank 
in 1849, the Society's Store has become the virtual Savings 
Bank of the place. 

The following table, completed to 1860 from the Alma- 
nack published by the Society, shows the pecuniary result 
of its operations from the commencement. 



Year. 


No. of 
Members. 


Amount of ca 


pital. 


Amount of c;ish sales 
in store (annual). 


Amount of 
(annual 


profit 






£ 


8. 


d. 


£ 


8. 


d. 


£ 8. 


d. 


1844 


28 


28 



















1845 


74 


181 


12 


5 


710 


6 


5 


32 17 


6 


1846 


86 


252 


7 


H 


1,146 


17 


7 


80 16 


H 


1847 


110 


286 


5 


H 


1,924 


13 


10 


72 2 


10 


1848 


140 


397 








2,276 


6 


H 


117 16 


104 


1849 


390 


1,193 


19 


1 


6,611 


18 





561 3 


9 


1850 


600 


2,299 


lu 


5 


13,179 


17 





889 12 


5 


1851 


630 


2,785 





H 


17,638 


4 





990 19 


H 


1852 


680 


3,471 





6 


16,352 


5 





1,206 15 


H 


1853 


7-20 


5,848 


3 


11 


22,760 








1,674 18 


114 


1854 


900 


7,172 


15 


7 


33,364 








1,763 11 


24 


1855 


1400 


11,032 


12 


10-* 


44,902 


12 





3,106 8 


H 


1856 


1600 


12,920 


13 


H 


63,197 


10 





3,921 13 


14 


1857 


1850 


15,142 


1 


2 


79,788 








5,470 6 


H 


1858 


1950 


18,160 


5 


4 


71,689 








6,284 17 


u 


1859 


2703 


27,060 


14 


2 


104,012 








10,739 18 


6i 


1860 


3450 


37,710 


9 





152,063 








15,906 9 


11 



I need not enter into similar particulars respecting the 
Corn-Mill Society, and will merely state that in 1860 its 



.... These crowds of humble working men, who never knew before when 
they put good food in their mouths, whose every dinner was adulterated, whose 
shoes let in the water a month too soon, whose waistcoats shone with devils' 
dust, and whose wives wore calico that would not wash, now buy in the markets 
like millionnaires, and as far as pureness of food goes, live like lords." Far bet- 
ter, probably, in that particular ; for assuredly lords are not the customers least 
cheated, in the present race of dishonest competition. "They are weaving their 
own stuffs, making their own shoes, sewing their own garments, and grinding 
their own corn. They buy the purest sugar and the best tea, and grind their 
own coffee. They slaughter their own cattle, and the finest beasts of the land 
waddle down the streets of Rochdale for the consumption of flannel weavers and 
cobblers. (Last year the Society advertised for a Provision Agent to make pur- 
chases in Ireland, and to devote his whole time to that duty.) When did com- 
petition give poor men these advantages? And will any man say that the moral 
character of these people is not improved under these influences. The teetotal- 
lers of Rochdale acknowledge that the Store has made more sober men since it 



376 BOOK IV. CHAPTER VII. §6. 



. 



capital is set down, on the same authority, at c 26,618l. 14* 
Gd., and the profit for that single year at 10,164£. 12s. 5rZ. 
For the manufacturing establishment I have no certified 
information later than that of Mr. Holyoake, who states the 
capital of the concern, in 1857, to be 5500Z. But a letter 
in the Rochdale Observer of May 26, 1860, editorially 
announced as by a person of good information, says that 
the capital had at that time reached 50,000?. : and the 
same letter gives highly satisfactory statements respecting 
other similar associations : the Rossendale Industrial Com- 
pany, capital 40,000Z. ; the Walsden Co-operative Com- 
pany, capital 8,000£. ; the Bacup and Wardle Commercial 
Company, with a capital of 40,0007., " of which more than 
one-third is borrowed at 5 per cent, and this circumstance, 
during the last two years of unexampled commercial pros- 
perity, has caused the rate of dividend to shareholders to 
rise to an almost fabulous height." 

It is hardly possible to take any but a hopeful view of 
the prospects of mankind, when in the two leading coun- 
tries of the world, the obscure depths of society contain 
simple working men whose integrity, good sense, self-com- 
mand, and honourable confidence in one another, have ena- 
bled them to carry these noble experiments to the triumph- 
ant issue which the facts recorded in the preceding pages 

commenced than all their efforts have been able to make in the same time. 
Husbands who never knew what it was to be out of debt, and poor wives who 
during forty years never had sixpence uncondemned in their pockets, now pos- 
sess little stores of money sufficient to build them cottages, and go every week 
into their own market with money jingling in their pockets ; and in that market 
there is no distrust and no deception ; there is no adulteration, and no second 
prices. The whole atmosphere is honest. Those who serve, neither hurry, 
finesse, nor flatter. They have no interest in chicanery. They have but one 
duty to perform — that of giving fair measure, full weight, and a pure article. 
In other parts of the town, where competition is the principle of trade, all the 
preaching in Rochdale cannot produce moral effects like these. 

"As the Store has made no debts, it has incurred no losses; and during 
thirteen years' transactions, and receipts amounting to 303,852/., it has had no 
law-suits." The Arbitrators of the Societies, during all their years of office, have 
never had a case to decide, and are discontented that nobody quarrels." 



PROBABLE FUTURE OF THE LABOURING CLASSES. 377 

attest. Their admirable history shows how vast an increase 
might be made even in the aggregate productiveness of 
labour, if the labourers as a mass were placed in a relation 
to their work which would make it (what now it is not) 
their principle and their interest to do the utmost, instead 
of the least possible, in exchange for their remuneration. 
In the co-operative movement, the permanency of which 
may now be considered as ensured, we see exemplified the 
process for bringing about a change in society, which would 
combine the freedom and independence of the individual, 
with the moral, intellectual, and economical advantages of 
aggregate production ; and which, without violence or 
spoliation, or even any sudden disturbance of existing 
habits and expectations, would realize, at least in the in- 
dustrial department, the best aspirations of the democratic 
spirit, by putting an end to the division of society into the 
industrious and the idle, and effacing all social distinctions 
but those fairly earned by personal services and exertions. 
Associations like those which we have described, by the 
very process of their success, are a course of education in 
those moral and active qualities by which alone success can 
be either deserved or attained. As associations multiplied, 
they would tend more and more to absorb all work-people, 
except those who have too little understanding, or too little 
virtue, to be capable of learning to act on any other system 
than that of narrow selfishness. As this change proceeded, 
owners of capital would gradually find it to their advantage, 
instead of maintaining the struggle of the old system with 
work-people of only the worst description, to lend their 
capital to the associations ; to do this at a diminishing rate 
of interest, and at last, perhaps, even to exchange their 
capital for terminable annuities. In this or some such 
mode, the existing accumulations of capital might honestly, 
and by a kind of spontaneous process, become in the end 
the joint property of all who participate in their productive 
employment : a transformation which, thus effected, (and 
assuming of course that both sexes participate equally in 



378 B00K IV - CHAPTER VH. §7. 

the rights and in the government of the association) * would 
be the nearest approach to social justice, and the most bene- 
ficial ordering of industrial affairs for the universal good, 
which it is possible at present to foresee. 

§ 7. I agree, then, with the Socialist writers in their 
conception of the form which industrial operations tend to 
assume in the advance of improvement ; and I entirely 
share their opinion that the time is ripe for commencing 
this transformation, and that it should by all just and effect- 
ual means be aided and encouraged. But while I agree 
and sympathize with Socialists in this practical portion of 
their aims, I utterly dissent from the most conspicuous and 
vehement part of their teaching, their declamations against 
competition. With moral conceptions in many respects far 
ahead of the existing arrangements of society, they have 
in general very confused and erroneous notions of its actual 
working ; and one of their greatest errors, as I conceive, is to 
charge upon competition all the economical evils which at 
present exist. They forget that wherever competition is 
not, monopoly is ; and that monopoly, in all its forms, is 
the taxation of the industrious for the support of indolence, 
if not of plunder. They forget, too, that with the excep- 
tion of competition among labourers, all other competition 
is for the benefit of the labourers, by cheapening the articles 
they consume ; that competition even in the labour mar- 



* In this respect also the Rochdale Society has given an example of reason 
and justice, worthy of the good sense and good feeling manifested in their gen- 
eral proceedings. " The Rochdale Store," says Mr. Holyoake, " renders inci- 
dental but valuable aid towards realizing the civil independence of women. 
Women may be members of this Store, and vote in its proceedings. Single and 
married women join. Many married women become members because theii 
husbands will not take the trouble, and others join in it In self-defence, to pre- 
vent the husband from spending their money in drink. The husband cannot 
withdraw the savings at the Store standing in the wife's name, unless she signs 
the order. Of course, as the law still stands, the husband could by legal process 
get possession of the money. But a process takes time, and the husband gets 
sober and thinks better of it before the law can move." 



PROBABLE FUTURE OF THE LABOURING CLASSES. 379 

ket is a source not of low but of high wages, wherever 
the competition for labour exceeds the competition of 
labour, as in America, in the colonies, and in the skilled 
trades ; and never could be a cause of low wages, save by 
the overstocking of the labour market through the too great 
numbers of the labourers 1 families ; while, if the supply of 
labourers is excessive, not even Socialism can prevent their 
remuneration from being low. Besides, if association were 
universal, there would be no competition between la- 
bourer and labourer ; and that between association and 
association would be for the benefit of the consumers, 
that is, of the associations ; of the industrious classes gene- 
rally. 

I do not pretend that there are no inconveniences in 
competition, or that the moral objections urged against it 
by Socialist writers, as a source of jealousy and hostility 
among those engaged in the same occupation, are altogether 
groundless. But if competition has its evils, it prevents 
greater evils. As M. Feugueray well says,* " La racine la 
plus profonde des maux et des iniquites qui couvrent le 
monde industriel, n'est pas la concurrence, mais bien l'ex- 
ploitation du travail par le capital, et la part enorme que 
les possesseurs des instruments de travail prelevent sur les 
produits .... Si la concurrence a beaucoup de puissance 
pour le mal, elle n'a pas moins de fecondite pour le bien, 
surtout en ce qui concerne le developpement des facultes 
individuelles, et le succes des innovations." It is the com- 
mon error of Socialists to overlook the natural indolence of 
mankind ; their tendency to be passive, to be the slaves of 
habit, to persist indefinitely in a course once chosen. Let 
them once attain any state of existence which they consider 
tolerable, and the danger to be apprehended is that they 
will thenceforth stagnate ; will not exert themselves to im- 
prove, and by letting their faculties rust, will lose even 
the energy required to preserve them from deterioration. 
Competition may not be the best conceivable stimulus, but 

* P. 90. 



380 BOOK IV. CHAPTER VII. § 1. 

it is at present a necessary one, and no one can foresee the 
time when it will not be indispensable to progress. Even 
confining ourselves to the industrial department, in which, 
more than in any other, the majority may be supposed to 
be competent judges of improvements ; it would be difficult 
to induce the general assembly of an association to submit 
to the trouble and inconvenience of altering their habits by 
adopting some new and promising invention, unless their 
knowledge of the existence of rival associations made them 
apprehend that what they would not consent to do, others 
would, and that they would be left behind in the race. 

Instead of looking upon competition as the baneful and 
anti-social principle which it is held to be by the generality 
of Socialists, I conceive that, even in the present state of 
society and industry, every restriction of it is an evil, and 
every extension of it, even if for the time injuriously affect- 
ing some class of labourers, is always an ultimate good. 
To be protected against competition is to be protected in 
idleness, in mental dulness ; to be saved the necessity of 
being as active and as intelligent as other people ; and if it 
is also to be protected against being underbid for employ- 
ment by a less highly paid class of labourers, this is only 
where old custom or local and partial monopoly has placed 
some particular class of artisans in a privileged position as 
compared with the rest ; and the time has come when the 
interest of universal improvement is no longer promoted by 
prolonging the privileges of a few. If the slopsellers and 
other of their class have lowered the wages of tailors, and 
some other artisans, by making them an affair of competi- 
tion instead of custom, so much the better in the end. 
What is now required is not to bolster up old customs, 
whereby limited classes of labouring people obtain partial 
gains which interest them in keeping up the present organ- 
ization of society, but to introduce new general practices 
beneficial to all ; and there is reason to rejoice at whatever 
makes the privileged classes of skilled artisans feel, that 



PROBABLE FUTURE OF THE LABOURING CLASSES 381 

they have the same interests, and depend for their remu- 
neration on the same general causes, and must resort for the 
improvement of their condition to the same remedies, as 
the less fortunately circumstanced and comparatively help- 
less multitude. 



BOOK V. 



ON THE INFLUENCE OF GOVEKN- 

MENT. 



BOOK V. 

OF THE INFLUENCE OF GOVERN- 
MENT. 



CHAPTER I. 

OF THE FUNCTIONS OF GOVERNMENT IN GENERAL. 

§ 1. One of the most disputed questions both in politi- 
cal science and in practical statesmanship at this particular 
period, relates to the proper limits of the functions and 
agency of governments. At other times it has been a sub- 
ject of controversy how governments should be constituted, 
and according to what principles and rules they should 
exercise their authority ; but it is now almost equally a 
question, to what departments of human affairs that au- 
thority should extend. And when the tide sets so strongly 
towards changes in government and legislation, as a means 
of improving the condition of mankind, this discussion is 
more likely to increase than to diminish in interest. On 
the one hand, impatient reformers, thinking it easier and 
shorter to get possession of the government than of the 
intellects and dispositions of the public, are under a constant 
temptation to stretch the province of government beyond 
due bounds : while, on the other, mankind have been so 
much accustomed by their rulers to interference for pur- 
64 



BOOK V. CHAPTER I. §2. 

poses other than the public good, or under an erroneous 
conception of what that good requires, and so many rash 
proposals are made by sincere lovers of improvement, for 
attempting, by compulsory regulation, the attainment of 
objects which can only be effectually or only usefully com- 
passed by opinion and discussion, that there has grown up 
a spirit of resistance in limine to the interference of govern- 
ment, merely as such, and a disposition to restrict its sphere 
of action within the narrowest bounds. From differences 
in the historical development of different nations, not 
necessary to be here dwelt upon, the former excess, that of 
exaggerating the province of government, prevails most, 
both in theory and in practice, among the Continental na- 
tions, while in England the contrary spirit has hitherto been 
predominant. 

The general principles of the question, in so far as it is a 
question of principle, I shall make an attempt to determine 
in a later chapter of this Book : after first considering the 
effects produced by the conduct of government in the exer- 
cise of the functions universally acknowledged to belong to it. 
For this purpose, there must be a specification of the func- 
tions which are either inseparable from the idea of a govern- 
ment, or are exercised habitually and without objection by 
all governments ; as distinguished from those respecting 
which it has been considered questionable whether govern- 
ments should exercise them or not. The former may be 
termed the necessary, the latter the optional, functions of 
government. By the term optional it is not meant to 
imply, that it can ever be a matter of indifference, or ot 
arbitrary choice, whether the government should or should 
not take upon itself the functions in question ; but only 
that the expediency of its exercising them does not amount 
to necessity, and is a subject on which diversity of opinion 
does or may exist. 

§ 2. In attempting to enumerate the necessary func- 
tions of government, we find them to be considerably more 



FUNCTIONS OF GOVERNMENT IN GENERAL. 387 

multifarious than most people are at first aware of, and not 
capable of being circumscribed by those very definite lines 
of demarcation, which, in the inconsiderateness of popular 
discussion, it is often attempted to draw round them. We 
sometimes, for example, hear it said that governments ought 
to confine themselves to affording protection against force 
and fraud : that, these two things apart, people should be 
free agents, able to take care of themselves, and that so long 
as a person practises no violence or deception, to the injury 
of others in person or property, legislatures and govern- 
ments are in no way called on to concern themselves about 
him. But why should people be protected by their govern- 
ment, that is, by their own collective strength, against 
violence and fraud, and not against other evils, except that 
the expediency is more obvious? If nothing, but what 
people cannot possibly do for themselves, can be fit to be 
done for them by government, people might be required to 
protect themselves by their skill and courage even against 
force, or to beg or buy protection against it, as they actually 
do where the government is not capable of protecting them : 
and against fraud every one has the protection of his own 
wits. But without further anticipating the discussion of 
principles, it is sufficient on the present occasion to con- 
sider facts. 

Under which of these heads, the repression of force or 
of fraud, are we to place the operation, for example, of the 
laws of inheritance ? Some such laws must exist in all 
societies. It may be said, perhaps, that in this matter 
government has merely to give effect to the disposition 
which an individual makes of his own property by will. 
This, however, is at least extremely disputable ; there is 
probably no country by whose laws the power of testament- 
ary disposition is perfectly absolute. And suppose the 
very common case of there being no will : does not the law, 
that is, the government, decide on principles of general 
expediency, who shall take the succession ? and in case the 
successor is in any manner incompetent, does it not appoint 



388 B00K v - CHAPTER I. §2. 

persons, frequently officers of its own, to collect the pro- 
perty and apply it to his benefit ? There are many other 
cases in which the government undertakes the administra- 
tion of property, because the public interest, or perhaps 
only that of the particular persons concerned, is thought to 
require it. This is often done in cases of litigated property ; 
and in cases of judicially declared insolvency. It has 
never been contended that in doing these things, a govern- 
ment exceeds its province. 

Nor is the function of the law in defining property itself, 
so simple a thing as may be supposed. It may be ima- 
gined, perhaps, that the law has only to declare and pro- 
tect the right of every one to what he has himself produced, 
or acquired by the voluntary consent, fairly obtained, of those 
who produced it. But is there nothing recognised as prop- 
erty except what has been produced ? Is there not the 
earth itself, its forests and waters, and all other natural 
riches, above and below the surface ? These are the inheri- 
tance of the human race, and there must be regulations for 
the common enjoyment of it. What rights, and under 
what conditions, a person shall be allowed to exercise over 
any portion of this common inheritance, cannot be left 
undecided. No function of government is less optional 
than the regulation of these things, or more completely in- 
volved in the idea of civilized society. 

Again, the legitimacy is conceded of repressing violence 
or treachery ; but under which of these heads are we to 
place the obligation imposed on people to perform their 
contracts ? Non-performance does not necessarily imply 
fraud ; the person who entered into the contract may have 
sincerely intended to fulfil it : and the term fraud, which 
can scarcely admit of being extended even to the case of 
voluntary breach of contract when no deception was prac- 
tised, is certainly not applicable when the omission to per- 
form is a case of negligence. Is it no part of the duty of 
governments to enforce contracts? Here the doctrine of 
non-interference would no doubt be stretched a little, and it 



FUNCTIONS OF GOVERNMENT IN GENERAL. 38& 

would be said, that enforcing contracts is not regulating the 
affairs of individuals at the pleasure of government, but 
giving effect to their own expressed desire. Let us acquiesce 
in this enlargement of the restrictive theory, and take it for 
what it is worth. But governments do not limit their con- 
cern with contracts to a simple enforcement. They take 
upon themselves to determine what contracts are fit to be 
enforced. It is not enough that one person, not being either 
cheated or compelled, makes a promise to another. There 
are promises by which it is not for the public good that 
persons should have the power of binding themselves. To 
say nothing of engagements to do something contrary to 
law, there are engagements which the law refuses to en- 
force, for reasons connected with the interest of the prom- 
iser, or with the general policy of the state. A contract 
by which a person sells himself to another as a slave, would 
be declared void by the tribunals of this and of most other 
European countries. There are few nations whose laws en- 
force a contract for what is looked upon as prostitution, or 
any matrimonial engagement of which the conditions vary 
in any respect from those which the law has thought fit to 
prescribe. But when once it is admitted that there are any 
engagements which for reasons of expediency the law ought 
not to enforce, the same question is necessarily opened with 
respect to all engagements. "Whether, for example, the law 
should enforce a contract to labour, when the wages are too 
low, or the hours of work too severe : whether it should 
enforce a contract by which a person binds himself to 
remain, for more than a very limited period, in the service 
of a given individual : whether a contract of marriage, 
entered into for life, should continue to be enforced against 
the deliberate will of the persons, or of either of the persons, 
who entered into it. Every question which can possibly 
arise as to the policy of contracts, and of the relations which 
they establish among human beings, is a question for the 
legislator ; and one which he cannot escape from consider- 
ing, and in some way or other deciding. 



g90 BOOK V, CHAPTER t §2. 

Again, the prevention and suppression of force and fraud 
afford appropriate employment for soldiers, policemen, and 
criminal judges ; but there are also civil tribunals. The 
punishment of wrong is one business of an administration 
of justice, but the decision of disputes is another. Innume- 
rable disputes arise between persons, without mala fides on 
either side, through misconception of their legal rights, or 
from not being agreed about the facts, on the proof of which 
those rights are legally dependent. Is it not for the general 
interest that the State should appoint persons to clear up 
these uncertainties and terminate these disputes ? It cannot 
be said to be a case of absolute necessity. People might 
appoint an arbitrator, and engage to submit to his decision ; 
and they do so where there are no courts of justice, or 
where the courts are not trusted, or where their delays and 
expenses, or the irrationality of their rules of evidence, deter 
people from resorting to them. Still, it is universally 
thought right that the State should establish civil tribunals ; 
and if their defects often drive people to have recourse to 
substitutes, even then the power held in reserve of carrying 
the case before a legally constituted court, gives to the sub- 
stitutes their principal efficacy. 

Not only does the State undertake to decide disputes, it 
takes precautions beforehand that disputes may not arise. 
The laws of most countries lay down rules for determining 
many things, not because it is of much consequence in what 
way they are determined, but in order that they may be 
determined somehow, and there may be no question on the 
subject. The law prescribes forms of words for many kinds 
of contract, in order that no dispute or misunderstanding 
may arise about their meaning : it makes provision that if a 
dispute does arise, evidence shall be procurable for deciding 
it, by requiring that the document be attested by witnesses 
and executed with certain formalities. The law preserves 
authentic evidence of facts to which legal consequences are 
attached, by keeping a registry of such facts ; as of births, 
deaths, and marriages, of wills and contracts, and of judi- 



FUNCTIONS OF GOVERNMENT IN GENERAL. 391 

cial proceedings. In doing these things, it has never been 
alleged that government oversteps the proper limits of its 
functions. 

Again, however wide a scope we may allow to the 
doctrine that individuals are the proper guardians of their 
own interests, and that government owes nothing to them 
but to save them from being interfered with by other peo- 
ple, the doctrine can never be applicable to any persons but 
those who are capable of acting in their own behalf. The 
individual may be an infant or a lunatic, or fallen into im- 
becility. The law surely must look after the interest of 
such persons. It does not necessarily do this through officers 
of its own. It often devolves the trust upon some relative 
or connexion. But in doing so is its duty ended ? Can it 
make over the interests of one person to the control of 
another, and be excused from supervision, or from holding 
the person thus trusted, responsible for the discharge of the 
trust ? 

There is a multitude of cases in which governments, 
with general approbation, assume powers and execute func- 
tions for which no reason can be assigned except the simple 
one, that they conduce to general convenience. We may 
take as an example, the function (which is a monopoly too) 
of coining money. This is assumed for no more recondite 
purpose tli an that of saving to individuals the trouble, 
delay, and expense of weighing and assaying. No one, 
however, even of those most jealous of state interference, 
has objected to this as an improper exercise of the powers 
of government. Prescribing a set of standard weights and 
measures is another instance. Paving, lighting, and cleans- 
ing the streets and thoroughfares, is another ; whether done 
by the general government, or, as is more usual, and gener- 
ally more advisable, by a municipal authority. Making or 
improving harbours, building light-houses, making surveys 
in order to have accurate maps and charts, raising dykes to 
keep the sea out, and embankments to keep rivers in, are 
cases in point. 



392 B00K Y - CHAPTER I. §3. 

Examples might be indefinitely multiplied without 
intruding on any disputed ground. But enough has been 
said to show that the admitted functions of government 
embrace a much wider field than can easily be included 
within the ring-fence of any restrictive definition, and that 
it is hardly possible to find any ground of justification 
common to them all, except the comprehensive one of 
general expediency ; nor to limit the interference of govern- 
ment by any universal rule, save the simple and vague one 
that it should never be admitted but when the case of expe- 
diency is strong. 

§ 3. Some observations, however, may be usefully be- 
stowed on the nature of the considerations on which the 
question of government interference is most likely to turn, 
and on the mode of estimating the comparative magnitude 
of the expediencies involved. This will form the last of the 
three parts into which our discussion of the principles and 
effects of government interference may conveniently be 
divided. The following will be our division of the subject. 

We shall first consider the economical effects arising 
from the manner in which governments perform their neces- 
sary and acknowledged functions. 

We shall then pass to certain governmental interferences 
of what I have termed the optional kind (i.e. overstepping 
the boundaries of the universally acknowledged functions) 
which have heretofore taken place, and in some cases still 
take place, under the influence of false general theories. 

It will lastly remain to inquire whether, independently 
of any false theory, and consistently with a correct view of 
the laws which regulate human affairs, there be any cases 
of the optional class in which governmental interference is 
really advisable, and what are those cases. 

The first of these divisions is of an extremely miscel- 
laneous character : since the necessary functions of govern- 
ment, and those which are so manifestly expedient that 
they have never or very rarely been objected to, are, as 



FUNCTIONS OF GOVERNMENT IN GENERAL. 393 

already pointed out, too various to be brought under any 
very simple classification. Those, however, which are of 
principal importance, which alone it is necessary here to 
consider, may be reduced to the following general heads. 

First, the means adopted by governments to raise the 
revenue which is the condition of their existence. 

Secondly, the nature of the laws which they prescribe on 
the two great subjects of Property and Contracts. 

Thirdly, the excellences or defects of the system of 
means by which they enforce generally the execution of 
their laws, namely, their j udicature and police. 

We commence with the first head, that is, with the 
theory of Taxation. 



CHAPTER n. 

ON THE GENERAL PRINCIPLES OF TAXATION. 

§ 1. The. qualities desirable, economically speaking, 
m a system of taxation, have been embodied by Adam 
Smith in four maxims or principles, which, having been 
generally concurred in by subsequent writers, may be said 
to have become classical, and this chapter cannot be better 
commenced than by quoting them.* 

" 1. The subjects of every state ought to contribute to 
the support of the government, as nearly as possible in pro- 
portion to their respective abilities : that is, in proportion to 
the revenue which they respectively enjoy under the pro- 
tection of the state. In the observation or neglect of this 
maxim consists what is called the equality or inequality of 
taxation. 

" 2. The tax which each individual is bound to pay 
ought to be certain, and not arbitrary. The time of pay- 
ment, the ' manner of payment, the quantity to be paid, 
ought all to be clear and plain to the contributor, and to 
every other person. Where it is otherwise, every person 
subject to the tax is put more or less in the power of the 
taxgatherer, who can either aggravate the tax upon any 
obnoxious contributor, or extort by the terror of such 
aggravation, some present or perquisite to himself. The 
uncertainty of taxation encourages the insolence and fa- 
vours the corruption of an order of men who are naturally 
unpopular, even when they are neither insolent nor cor- 

* Wealth of Nations, book v. ch. ii. 



GENERAL PRINCIPLES OF TAXATION. 395 

rupt. The certainty of what each individual ought to pay- 
is, in taxation, a matter of so great importance, that a very 
considerable degree of inequality, it appears, I believe, from 
the experience of all nations, is not near so great an evil, as 
a very small degree of uncertainty. 

" 3. Every tax ought to be levied at the time, or in the 
manner, in which it is most likely to be convenient for the 
contributor to pay it. A tax upon the rent of land or of 
houses, payable at the same term at which such rents are 
usually paid, is levied at a time when it is most likely to be 
convenient for the contributor to pay ; or when he is most 
likely to have wherewithal to pay. Taxes upon such con- 
sumable goods as are articles of luxury, are all finally paid 
by the consumer, and generally in a manner that is very 
convenient to him. He pays them by little and little, as he 
has occasion to buy the goods. As he is at liberty, too, 
either to buy or not to buy, as he pleases, it must be his own 
fault if he ever suffers any considerable inconvenience from 
such taxes. 

" 4. Every tax ought to be so contrived as both to take 
out and to keep out of the pockets of the people as little 
as possible over and above what it brings into the public 
treasury of the state. A tax may either take oat or keep 
out of the pockets of the people a great deal more than it 
brings into the public treasury in the four following ways. 
First, the levying of it may require a great number of offi- 
cers, whose salaries may eat up the greater part of the prod- 
uce of the tax and whose perquisites may impose another 
additional tax upon the people." Secondly, it may divert a 
portion of the labour and capital of the community from a 
more to a less productive employment. " Thirdly, by the 
forfeitures and other penalties which those unfortunate indi- 
viduals incur who attempt unsuccessfully to evade the tax, 
it may frequently ruin them, and thereby put an end to the 
benefit which the community might have derived from the 
employment of their capitals. An injudicious tax offers a 
great temptation to smuggling. Fourthly, by subjecting 



396 B00K v - CHAPTER II. §2. 

the people to the frequent visits and the odious examination 
of the tax-gatherers, it may expose them to much unnec- 
essary trouble, vexation, and oppression : " to which may 
be added, that the restrictive regulations to which trades 
and manufactures are often subjected to prevent evasion of 
a tax, are not only in themselves troublesome and expensive, 
but often oppose insuperable obstacles to making improve- 
ments in the processes. 

The last three of these four maxims require little other 
explanation or illustration than is contained in the passage 
itself. How far any given tax conforms to, or conflicts with 
them, is a matter to be considered in the discussion of par- 
ticular taxes. But the first of the four points, equality of 
taxation, requires to be more fully examined, being a thing 
often imperfectly understood, and on which many false no- 
tions have become to a certain degree accredited, through the 
absence of any definite principles of judgment in the popular 
mind. 

§ 2. For what reason ought equality to be the rule in 
matters of taxation ? For the reason, that it ought to be so 
in all affairs of government. As a government ought to 
make no distinction of persons or classes in the strength of 
their claims on it, whatever sacrifices it requires from them 
should be made to bear as nearly as possible with the same 
pressure upon all, which it must be observed, is the mode by 
which least sacrifice is occasioned on the whole. If any one 
bears less than his fair share of the burthen, some other 
person must suffer more than his share, and the alleviation 
to the one is not, cceteris paribus, so great a good to him, as 
the increased pressure upon the other is an evil. Equality 
of taxation, therefore, as a maxim of politics, means equality 
of sacrifice. It means apportioning the contribution of each 
person towards the expenses of government, so that he shall 
feel neither more nor less inconvenience from his share of the 
payment than every other person experiences from his. 
This standard, like other standards of perfection, cannot be 



GENERAL PRINCIPLES OF TAXATION. 397 

completely realized ; but the first object in every practical 
discussion should be to know what perfection is. 

There are persons, however, who are not content with 
the general principles of justice as a basis to ground a rule 
of finance upon, but must have something, as they think, 
more specifically appropriate to the subject. What best 
pleases them is, to regard the taxes paid by each member 
of the community as an equivalent for value received, in 
the shape of service to himself; and they prefer to rest 
the justice of making each contribute in proportion to his 
means, upon the ground, that he who has twice as much 
property to be protected, receives, on an accurate calculation, 
twice as much protection, and ought, on the principles of 
bargain and sale, to pay twice as much for it. Since, how- 
ever, the assumption that government exists solely for the 
protection of property, is not one to be deliberately adhered 
to ; some consistent adherents of the quid pro quo principle 
go on to observe, that protection being required for persons 
as well as property, and everybody's person receiving the 
same amount of protection, a poll-tax of a fixed sum per head 
is a proper equivalent for this part of the benefits of govern- 
ment, while the remaining part, protection to property, should 
be paid for in proportion to property. There is in this ad- 
justment a false air of nice adaptation, very acceptable to 
some minds. But in the first place, it is not admissible that 
the protection of persons and that of property are the sole 
purposes of government. The ends of government are as 
comprehensive as those of the social union. They consist of 
all the good, and all the immunity from evil, which the exist- 
ence of government can be made either directly or indirectly 
to bestow. In the second place, the practice of setting 
definite values on things essentially indefinite, and making 
them a ground of practical conclusions, is peculiarly fertile 
in false views of social questions. It cannot be admitted, 
that to be protected in the ownership of ten times as much 
property, is to be ten times as much protected. Whether 
the labour and expense of the protection, or the feelings of 



398 B00K v - CHAPTER II. §3. 

the protected person, or any other definite thing be made 
the standard, there is no such proportion as the one sup- 
posed, nor any other definable proportion. If we wanted to 
estimate the degrees of benefit which different persons derive 
from the protection of government, we should have to con- 
sider who would suffer most if that protection were with- 
drawn : to which question if any answer could be made, it 
must be, that those would suffer most who were weakest in 
mind or body, either by nature or by position. Indeed, 
such persons would almost infallibly be slaves. If there 
were any justice, therefore, in the theory of justice now 
under consideration, those who are least capable of helping 
or defending themselves, being those to whom the protec- 
tion of government is the most indispensable, ought to pay 
the greatest share of its price : the reverse of the true idea 
of distributive justice, which consists not in imitating but 
in redressing the inequalities and wrongs of nature. 

Government must be regarded as so pre-eminently a con- 
cern of all, that to determine who are most interested in it 
is of no real importance. If a person or class of persons 
receive so small a share of the benefit as makes it necessary 
to raise the question, there is something else than taxation 
which is amiss, and the thing to be done is to remedy the 
defect, instead of recognising it and making it a ground for 
demanding less taxes. As in a case of voluntary subscrip- 
tion for a purpose in which all are interested, all are thought 
to have done their part fairly when each has contributed 
according to his means, that is, has made an equal sacrifice 
for the common object ; in like manner should this be the 
principle of compulsory contributions : and it is superfluous 
to look for a more ingenious or recondite ground to rest the 
principle upon. 

§ 3. Setting out, then, from the maxim that equal 
sacrifices ought to be demanded from all, we have next to 
inquire whether this is in fact done, by making each contrib- 
ute the same percentage on his pecuniary means. Many 



GENERAL PRINCIPLES OF TAXATION. 399 

persons maintain the negative, saying that a tenth part taken 
from a small income is a heavier burthen than the same 
fraction deducted from one much larger ; and on this is 
grounded the very popular scheme of what is called a 
graduated property tax, viz. an income tax in which the 
percentage rises with the amount of the income. 

On the best consideration I am able to give to this 
question, it appears to me that the portion of truth which the 
doctrine contains, arises principally from the difference be- 
tween a tax which can be saved from luxuries, and one which 
trenches, in ever so small a degree, upon the necessaries of 
life. To take a thousand a year from the possessor of ten 
thousand, would not deprive him of anything really condu- 
cive either to the support or to the comfort of existence ; 
and if such would be the effect of taking five pounds from 
one whose income is fifty, the sacrifice required from the last 
is not only greater than, but entirely incommensurable with, 
that imposed upon the first. The mode of adjusting these 
inequalities of pressure which seems to be the most equitable, 
is that recommended by Bentham, of leaving a certain min- 
imum of income, sufficient to provide the necessaries of life, 
untaxed. Suppose 50/. a year to be sufficient to provide 
the number of persons ordinarily supported from a single 
income, with the requisites of life and health, and with 
protection against habitual bodily suffering, but not with 
any indulgence. This then should be made the minimum, 
and incomes exceeding it should pay taxes not upon their 
whole amount, but upon the surplus. If the tax be ten per 
cent, an income of 601. should be considered as a net income 
of 107., and charged with 11. a year, while an income of 
1000Z. should be charged as one of 950/. Each would then 
pay a fixed proportion, not of his whole means, but of his 
superfluities. An income not exceeding 50/. should not be 
taxed at all, either directly or by taxes on necessaries ; for as 
by supposition this is the smallest income which labour 
ought to be able to command, the government ought not to 
be a party to making it smaller. This arrangement however 



4-00 BOOK V. CHAPTER II. §3. 

would constitute a reason, in addition to others which might 
be stated, for maintaining taxes on articles of luxury con- 
sumed by the poor. The immunity extended to the income 
required for necessaries, should depend on its being actually 
expended for that purpose ; and the poor who, not having 
more than enough for necessaries, divert any part of it 
to indulgences, should like other people contribute their 
quota out of those indulgences to the expenses of the state. 

The exemption in favour of the smaller incomes should 
not, I think, be stretched further than to the amount of 
income needful for life, health, and immunity from bodily 
pain. If 50/. a year is sufficient (which may be doubted) for 
these purposes, an income of 1001. a year would, as it seems 
to me, obtain all the relief it is entitled to, compared with one 
of 1000/., by being taxed only on 501. of its amount. It may 
be said, indeed, that to take 100/. from 1000/. (even giving 
back five pounds) is a heavier impost than 1000/. taken 
from 10,000/. (giving back the same five pounds). But this 
doctrine seems to me too disputable altogether, and even if 
true at all, not true to a sufficient extent, to be made the 
foundation of any rule of taxation. Whether the person 
with 10,000/. a year cares less for 1000/. than the person 
with only 1000/. a year cares for 100/., and if so, how much 
less, does not appear to me capable of being decided with the 
degree of certainty on which a legislator or a financier ought 
to act. 

Some indeed contend that the rule of proportional taxa- 
tion bears harder upon the moderate than upon the large in- 
comes, because the same proportional payment has mor& 
tendency in the former case than in the latter, to reduce the 
payer to a lower grade of social rank. The fact appears to 
me more than questionable. But even admitting it, I object 
to its being considered incumbent on government to shape 
its course by such considerations, or to recognise the notion 
that social importance is or can be determined by amount 
of expenditure. Government ought to set an example of 
rating all things at their true value, and riches, therefore. 



GENERAL PRINCIPLES OF TAXATION. 401 

at the worth, for comfort or pleasure, of the things which 
they will buy : and ought not to sanction the vulgarity of 
prizing them for the pitiful vanity of being known to pos- 
sess them, or the paltry shame of being suspected to be 
without them, the presiding motives of three-fourths of the 
expenditure of the middle classes. The sacrifices of real 
comfort or indulgence which government requires, it is 
bound to apportion among all persons with as much equality 
as possible ; but their sacrifices of the imaginary dignity 
dependent on expense, it may spare itself the trouble of 
estimating. 

Both in England and on the Continent a graduated 
property-tax {Virajpot progress] if) has been advocated, on the 
avowed ground that the state should use the instrument of 
taxation as a means of mitigating the inequalities of wealth. 
I am as desirous as any one, that means should be taken to 
diminish those inequalities, but not so as to relieve the 
prodigal at the expense of the prudent. To tax the larger 
incomes at a higher percentage than the smaller, is to lay a 
tax on industry and economy ; to impose a penalty on peo- 
ple for having worked harder and saved more than their 
neighbours. It is not the fortunes which are earned, but 
those which are unearned, that it is for the public good to 
place under limitation. A just and wise legislation would 
abstain from holding oat motives for dissipating rather than 
saving the earnings of honest exertion. Its impartiality 
between competitors would consist in endeavouring that 
they should all start fair, and not in hanging a weight upon 
the swift to diminish the distance between them and the 
slow. Many, indeed, fail with greater efforts than those 
with which others succeed, not from difference of merits, 
but difference of opportunities ; but if all were done which 
it would be in the power of a good government to do, by 
instruction and by legislation, to diminish this inequality of 
opportunities, the differences of fortune arising from peo- 
ple's own earnings could not justly give umbrage. With 
respect to the large fortunes acquired by gift or inheri- 
G5 ' 



402 BOOK V. CHAPTER II. §5. 

tance, the power of bequeathing is one of those privileges 
of property which are fit subjects for regulation on grounds 
of general expediency ; and I have already suggested,* as 
the most eligible mode of restraining the accumulation of 
laro-e fortunes in the hands of those who have not earned 
them by exertion, a limitation of the amount which any one 
person should be permitted to acquire by gift, bequest, or 
inheritance. Apart from this, and from the proposal of 
Bentham (also discussed in a former chapter) that collateral 
inheritance ab intestato should cease, and the property 
escheat to the state, I conceive that inheritances and lega- 
cies, exceeding a certain amount, are highly proper subjects 
for taxation : and that the revenue from them should be as 
great as it can be made without giving rise to evasions, by 
donation inter vivos or concealment of property, such as it 
would be impossible adequately to check. The principle of 
graduation (as it is called,) that is, of levying a larger per- 
centage on a larger sum, though its application to general 
taxation would be in my opinion objectionable, seems to 
me both just and expedient as applied to legacy and inheri- 
tance duties. 

The objection to a graduated property tax applies in an 
aggravated degree to the proposition of an exclusive tax on 
what is called " realized property," that is, property not 
forming a part of any capital engaged in business, or rather 
in business under the superintendence of the owner : as 
land, the public funds, money lent on mortgage, and shares 
(I presume) in joint stock companies. Except the proposal 
of applying a sponge to the national debt, no such palpable 
violation of common honesty has found sufficient support in 
this country, during the present generation, to be regarded 
as within the domain of discussion. It has not the palliation 
of a graduated property tax, that of laying the burthen on 
those best able to bear it ; for " realized property" includes 
the far larger portion of the provision made for those who 
are unable to work, and consists, in great part, of extremely 

* Supra, book ii. ch. 2. 



GENERAL PRINCIPLES OF TAXATION. 403 

small fractions. I can hardly conceive a more shameless 
pretension, than that the major part of the property of the 
country, that of merchants, manufacturers, farmers, and 
shopkeepers, should be exempted from its share of taxation ; 
that these classes should only begin to pay their proportion 
after retiring from business, and if they never retire should 
be excused from it altogether. But even this does not give 
an adequate idea of the injustice of the proposition. The 
burthen thus exclusively thrown on the owners of the 
smaller portion of the wealth of the community, would not 
even be a burthen on that class of persons in perpetual 
succession, but would fall exclusively on those who happened 
to compose it when the tax was laid on. As land and those 
particular securities would thenceforth yield a smaller net 
income, relatively to the general interest of capital and to 
the profits of trade ; the balance would rectify itself by a 
permanent depreciation of those kinds of property. Future 
buyers would acquire land and securities at a reduction of 
price, equivalent to the peculiar tax, which tax they would, 
therefore, escape from paying ; while the original possessors 
would remain burthened with it even after parting with the 
property, since they would have sold their land or securi- 
ties at a loss of value equivalent to the fee-simple of the 
tax. Its imposition would thus be tantamount to the con- 
fiscation for public uses of a percentage of their property, 
equal to the percentage laid on their income by the tax. 
That such a proposition should find any favour, is a strik- 
ing instance of the want of conscience in matters of taxa- 
tion, resulting from the absence of any fixed principles in 
the public mind, and of any indication of a sense of justice 
on the subject in the general conduct of governments. 
Should the scheme ever enlist a large party in its support, 
the fact would indicate a laxity of pecuniary integrity in 
national affairs, scarcely inferior to American repudiation. 

§ 4. Whether the profits of trade may not rightfully be 
taxed at a lower rate than incomes derived from interest or 



404 BOOK V. CHAPTER II. §4. 

rent, is part of the more comprehensive question, so often 
mooted on the occasion of the present income tax, whether 
life incomes should be subjected to the same rate of taxation 
as perpetual incomes ; whether salaries, for example, or 
annuities, or the gains of professions, should pay the same 
percentage as the income from inheritable property. 

The existing tax treats all kinds of incomes exactly alike, 
taking its sevenpence (now ninepence) in the pound, as well 
from the person whose income dies with him, as from the 
landholder, stockholder, or mortgagee, who can transmit 
his fortune undiminished to his descendants. This is a visible 
injustice : yet it does not arithmetically violate the rule that 
taxation ought to be in proportion to means. When it is said 
that a temporary income ought to be taxed less than a 
permanent one, the reply is irresistible, that it is taxed less ; 
for the income which lasts only ten years pays the tax only 
ten years, while that which lasts for ever pays for ever. 
On this point some financial reformers are guilty of a great 
fallacy. They contend that incomes ought to be assessed 
to the income tax not in proportion to their annual amount, 
but to their capitalized value : that, for example, if the 
value of a perpetual annuity of 100Z. is 30001., and a life- 
annuity of the same amount being worth only half the 
number of years' purchase could only be sold for 1500Z., the 
perpetual income should pay twice as much per cent in- 
come tax as the terminable income ; if the one pays 10Z. a 
year the other should pay only 51. But in this argument 
there is the obvious oversight, that it values the incomes by 
one standard and the payments by another ; it capitalizes 
the incomes, but forgets to capitalize the payments. An 
annuity worth S0001. ought, it is alleged, to be taxed twice 
as highly as one which is only worth 1500?., and no asser- 
tion can be more unquestionable ; but it is forgotten that 
the income worth 3000Z. pays to the supposed income tax 
101. a year in perpetuity, which is equivalent, by supposi- 
tion, to 300Z., while the terminable income pays the same 
101. only during the life of its owner, which on the same 



GENERAL PRINCIPLES OF TAXATION. 405 

calculation is a value of 150?. Already, therefore, the 
income which is only half as valuable, pays only half as 
much to the tax ; and if in addition to this its annual quota 
were reduced from 101. to 51., it would pay, not half, but a 
fourth part only of the payment demanded from the perpet- 
ual income. To make it just that the one income should 
pay only half as much per annum as the other, it would be 
necessary that it should pay that half for the same period, 
that is, in perpetuity. 

The rule of payment which this school of financial re- 
formers contend for, would be very proper if the tax were 
only to be levied once, to meet some national emergency. 
On the principle of requiring from all payers an equal sacri- 
fice, every person who had anything belonging to him, 
reversioners included, would be called on for a payment 
proportioned to the present value of his property. I wonder 
it does not occur to the reformers in question, that precisely 
because this principle of assessment would be just in the case 
of a payment made once for all, it cannot possibly be just for 
a permanent tax. When each pays only once, one person 
pays no often er than another ; and the proportion which 
would be just in that case, cannot also be just if one person 
has to make the payment only once, and the other several 
times. This, however, is the type of the case which actually 
occurs. The permanent incomes pay the tax as muchoftener 
than the temporary ones, as a perpetuity exceeds the certain 
or uncertain length of time which forms the duration of the 
income of life or years. 

All attempts to establish a claim in favour of terminable 
incomes on numerical grounds — to make out, in short, that a 
proportional tax is not a proportional tax — are manifestly 
absurd. The claim does not rest on grounds of arithmetic, 
but of human wants and feelings. It is not because the 
temporary annuitant has smaller means, but because he 
has greater necessities, that he ought to be assessed at a 
lower rate. 

In spite of the nominal equality of income, A, an annui- 



406 BOOK V. CHAPTER II. §4. 

tant of 1000Z. a year, cannot so well afford to pay 100Z. out 
of it, as B who derives the same annual sum from heritable 
property ; A having usually a demand on his income which 
B has not, namely, to provide by saving for children or 
others ; to which, in the case of salaries or professional gains, 
must generally be added a provision for his own later years ; 
while B may expend his whole income without injury to 
his old age, and still have it all to bestow on others after 
his death. If A, in order to meet these exigencies, must 
lay by 3001. of his income, to take 1001. from him as 
income tax is to take 1001. from 700Z., since it must be re- 
trenched from that part only of liis means which he can 
afford to spend on his own consumption. "Were he to 
throw it rateably on what he spends and on what he saves, 
abating 701. from his consumption and SOI. from his annual 
saving, then indeed his immediate sacrifice would be pro- 
portionally the same as B's : but then his children or his old 
age would be worse provided for in consequence of the tax. 
The capital sum which would be accumulated for them 
would be one-tenth less, and on the reduced income afford- 
ed by this reduced capital, they would be a second time 
charged with income tax ; while B's heirs would only be 
charged once. 

The principle, therefore, of equality of taxation, inter- 
' \preted in its only just sense, equality of sacrifice, requires 
that a person who has no means of providing for old age, 
or for those in whom he is interested, except by saving from 
income, should have the tax remitted on all that part of his 
income which is really and bond fide applied to that purpose. 

If, indeed, reliance could be placed on the conscience of 
the contributors, or sufficient security taken for the correct- 
ness of their statements by collateral precautions, the proper 
mode of assessing an income tax would be to tax only the 
part of income devoted to expenditure, exempting that 
which is saved. For when saved and invested (and all 
savings, speaking generally, are invested) it thenceforth 
pays income tax on the interest or profit which it brings, 



GENERAL PRINCIPLES OF TAXATION. 407 

notwithstanding that it has already been taxed on the 
principal. Unless, therefore, savings are exempted from 
income tax, the contributors are twice taxed on what they 
save, and only once on what they spend^j^A. person who 
spends all he receives, pays 7d. in the pound, or say three 
per cent, to the tax, and no more ; but if he saves part of 
the year's income and buys stock, then in addition to the 
three per cent which he has paid on the principal, and 
which diminishes the interest in the same ratio, he pays 
three per cent annually on the interest itself, which is 
equivalent to an immediate payment of a second three per 
cent on the principal. So that while unproductive expendi- 
ture pays only three per cent, savings pay six per cent : or 
more correctly, three per cent on the whole, and another 
three per cent on the remaining ninety-seven. The difference 
thus created to the disadvantage of prudence and economy, 
is not only impolitic but unjust. To tax the sum invested, 
and afterwards tax also the proceeds of the investment, is to 
tax the same portion of the contributor's means twice over. 
The principal and the interest cannot both together form 
part of his resources ; they are the same portion twice 
counted ; if he has the interest, it is because he abstains 
from using the principal ; if he spends the principal, he 
does not receive the interest. Yet because he can do either 
of the two, he is taxed as if he could do both, and could have 
the benefit of the saving and that of the spending, concur- 
rently with one another. 

It has been urged as an objection to exempting savings 
rom taxation, that the law ought not to disturb, by artificial 
interference, the natural competition between the motives 
for saving and those for spending. But we have seen that 
the law disturbs this natural competition when it taxes 
savings, not when it spares them ; for as the savings pay at 
any rate the full tax as soon as they are invested, their 
exemption from payment in the earlier stage is necessary to 
prevent them from paying twice, while money spent in 
unproductive consumption pays only once. It has been 



408 BOOK V. CHAPTER II. §4. 

further objected, that since the rich have the greatest means 
of saving, any privilege given to savings is an advantage be- 
stowed on the rich at the expense of the poor. I answer, 
that it is bestowed on them only in proportion as they abdi- 
cate the personal use of their riches ; in proportion as they 
divert their income from the supply of their own wants, to a 
productive investment, through which, instead of being con- 
sumed by themselves, it is distributed in wages among the 
poor. If this be favouring the rich, I should like to have it 
pointed out, what mode of assessing taxation can deserve 
the name of favouring the poor. 

No income tax is really just, from which savings are not 
exempted ; and no income tax ought to be voted without 
that provisionklf the form of the returns, and the nature of 
the evidence required, could be so arranged as to prevent 
the exemption from being taken fraudulent advantage of, 
by saving with one hand and getting into debt with the other, 
or by spending in the following year what had been passed 
tax-free as saving in the year preceding. If this difficulty 
could be surmounted, the difficulties and complexities arising 
from the comparative claims of temporary and permanent in- 
comes, would disappear ; for since temporary incomes have 
no just claim to lighter taxation than permanent incomes, 
except in so far as their possessors are more called upon 
to save, the exemption of what they do save would fully 
satisfy the claim. But if no plan can be devised for the 
exemption of actual savings, sufficiently free from liability 
to fraud, it is necessary, as the next thing in point of justice, 
to take into account in assessing the tax, what the different 
classes of contributors ought to save. And there would 
probably be no other mode of doing this than the rough 
expedient of two different rates of assessment. There 
would be great difficulty in taking into account differences 
of duration between one terminable income and another ; 
and in the most frequent case, that of incomes dependent on 
life, differences of age and health would constitute such 
Extreme diversity as it would be impossible to take proper 



GENERAL PRINCIPLES OF TAXATION. 409 

cognizance of. It would probably be necessary to be con- 
tent with one uniform rate for all incomes of inheritance, 
and another uniform rate for all those which necessarily 
terminate with the life of the individual. In fixing the 
proportion between the two rates, there must inevitably be 
something arbitrary ; perhaps a deduction of one-fourth in 
favour of life-incomes would be as little objectionable as any 
which coidd be made, it being thus assumed that one-fourth 
of a life-income is, on the average of all ages and states of 
health, a suitable proportion to be laid by as a provision foi 1 
successors and for old age.* 

* Mr. Hubbard, the first person who, as a practical legislator, has attempted 
the rectification of the income tax on principles of unimpeachable justice, and 
whose well-conceived plan wants little of being as near an approximation to a 
just assessment as it is likely that means could be found of carrying into practi- 
cal effect, proposes a deduction not of a fourth but of a third, in favour of indus- 
trial and professional incomes. He fixes on this ratio, on the ground that, inde- 
pendently of all consideration as to what the industrial and professional classes 
ought to save, the attainable evidence goes to prove that a third of their incomes 
is what on an average they do save, over and above the proportion saved by 
other classes. "The savings" (Mr. Hubbard observes) "effected out of incomes 
derived from invested property are estimated at one-tenth. The savings effected 
out of industrial incomes are estimated at four-tenths. The amounts which 
would be assessed under these two classes being nearly equal, the adjustment is 
simplified by striking off one-tenth on either side, and then reducing by three- 
tenths, or one-third, the assessable amount of industrial incomes." Proposed 
Report (p. xiv. of the Report and Evidence of the Committee of 1861.) In such 
an estimate there must be a large element of conjecture ; but in so far as it can 
be substantiated, it affords a valid ground for the practical conclusion which Mr. 
Hubbard founds on it. 

Several writers on the subject, including Mr. Mill in his Elements of Political 
Economy, and Mr. M'Culloch in his work on Taxation, have contended that as 
much should be deducted as would be sufficient to insure the possessor's life for 
a sum which would give to his successors for ever an income equal to what he 
reserves for himself; since this is what the possessor of heritable property can 
do without saving at all : in other words, that temporary incomes should be con- 
verted into perpetual incomes of equal present value, and taxed as such. If the 
owners of life-incomes actually did save this large proportion of their income, 
or even a still larger, I would gladly grant them an exemption from taxation on 
the whole amount, since, if practical means could be found of doing it, I would 
exempt savings altogether. But I cannot admit that they have a claim to ex- 
emption on the general assumption of their being obliged to save this amount 



410 BOOK V. CHAPTER II. §4. 

Of the net profits of persons in business, a part, as before 
observed, may be considered as interest on capital, and of a 
perpetual character, and the remaining part as remuneration 
for the skill and labour of superintendence. The surplus 
beyond interest depends on the life of the individual, and 
even on his continuance in business, and is entitled to the 
full amount of exemption allowed to terminable incomes. 
It has also, I conceive, a just claim to a further amount of 
exemption in consideration of its precariousness. An income 
which some not unusual vicissitude may reduce to nothing, 
or even convert into a loss, is not the same thing to the 
feelings of the possessor as a permanent income of 1000Z. a 
year, even though on an average of years it may yield 1000Z. 
a year. If life-incomes were assessed at three-fourths of 
their amount, the profits of business, after deducting interest 
on capital, should not only be assessed at three-fourths, but 
should pay, on that assessment, a lower rate. Or perhaps 
the claims of justice in this respect might be sufficiently met 
by allowing the deduction of a fourth on the entire income, 
interest included. 

These are the chief cases, of ordinary occurrence, in 
which any difficulty arises in interpreting the maxim of 
equality of taxation. The proper sense to be put upon it, 
as we have seen in the preceding example, is, that people 
should be taxed, not in proportion to what they have, but 



Owners of life-incomes are not bound to forego the enjoyment of them for the 
sake of leaving to a perpetual line of successors an independent provision equal 
to their own temporary one ; and no one ever dreams of doing so. Least of all 
is it to be required or expected from those whose incomes are the fruits of per- 
sonal exertion, that they should leave to their posterity for ever, without any 
necessity for exertion, the same incomes which they allow to themselves. Al! 
they are bound to do, even for their children, is to place them in circumstances 
in which they will have favourable chances of earning their own liviDg. To 
give, however, either to children or to others, by bequest, being a legitimate in- 
clination, which these persons cannot indulge without laying by a part of their 
income, while the owners of heritable property can; this real inequality in 
cases where the incomes themselves are equal, should be considered, to a reason- 
able degree, in the adjustment of taxation, so as to require from both, as nearly 
as practicable, an equal sacrifice. 



GENERAL PRINCIPLES OF TAXATION. 41 1 

to what they can afford to spend. It is no objection to this 
principle that we cannot apply it consistently to all cases. 
A person with a life-income and precarious health, or who 
has many persons depending on his exertions, must if he 
wishes to provide for them after his death, be more rigidly 
economical than one who has a life-income of equal amount, 
with a strong constitution, and few claims upon him ; and 
if it be conceded that taxation cannot accommodate itself to 
these distinctions, it is argued that there is no use in attend- 
ing to any distinctions, where the absolute amount of income 
is the same. But the difficulty of doing perfect justice, is 
no reason against doing as much as we can. Though it may 
be a hardship to an annuitant whose life is only worth five 
years' purchase, to be allowed no greater abatement than is 
granted to one whose life is worth twenty, it is better for 
him even so, than if neither of them were allowed any abate- 
ment at all. 

§ 5. Before leaving the subject of Equality of Taxation, 
I must remark that there are cases in which exceptions may 
be made to it, consistently with that equal justice which is 
the groundwork of the rule. Suppose that there is a kind 
of income which constantly tends to increase, without any 
exertion or sacrifice on the part of the owners : those owners 
constituting a class in the community, whom the natural 
course of things progressively enriches, consistently with 
complete passiveness on their own part. In such a case it 
would be no violation of the principles on which private 
property is grounded, if the state should appropriate this 
increase of wealth, or part of it, as it arises. This would 
not properly be taking anything from anybody ; it would 
merely be applying an accession of wealth, created by 
circumstances, to the benefit of society, instead of allowing 
it to become an unearned appendage to the riches of a par* 
ticular class. 

Now this is actually the case with rent. The ordinary 
progress of a society which increases in wealth, is at all 



412 BOOK V. CHAPTER II. §5. 

times tending to augment the incomes of landlords ; to give 
them both a greater amount and a greater proportion of the 
wealth of the community, independently of any trouble or 
outlay incurred by themselves. They grow richer, as it 
were in their sleep, without working, risking, or economiz- 
ing. What claim have they, on the general principle of 
social justice, to this accession of riches ? In what would 
they have been wronged if society had, from the beginning, 
reserved the right of taxing the spontaneous increase of rent, 
to the highest amount required by financial exigencies ? I 
admit that it would be unjust to come upon each individual 
estate, and lay hold of the increase which might be found to 
have taken place in its rental ; because there would be no 
means of distinguishing in individual cases, between an in- 
crease owing solely to the general circumstances of society, 
and one which was the effect of skill and expenditure on the 
part of the proprietor. The only admissible mode of pro- 
ceeding would be by a general measure. The first step 
should be a valuation of all the land in the country. The 
present value of all land should be exempt from the tax ; but 
after an interval had elapsed, during which society had in- 
creased in population and capital, a rough estimate might be 
made of the spontaneous increase which had accrued to rent 
since the valuation was made. Of this the average price of 
produce would be some criterion : if that had risen, it would 
be certain that rent had increased, and (as already shown) 
even in a greater ratio than the rise of price. On this and 
other data, an approximate estimate might be made, how 
much value had been added to the land of the country by 
natural causes ; and in laying on a general land-tax, which 
for fear of miscalculation should be considerably within the 
amount thus indicated, there would be an assurance of not 
touching any increase of income which might be the result 
of capital expended or industry exerted by the proprietor. 

But though there could be no question as to the justice 
of taxing the increase of rent, if society had avowedly re- 
served the right, has not society waved that right, by not 






GENERAL PRINCIPLES OF TAXATION. 413 

exercising it ? In England, for example, have not all who 
bought land for the last century or more, given value not 
only for the existing income, but for the prospects of in- 
crease, under an implied assurance of being only taxed in 
the same proportion with other incomes % This objection, 
in so far as valid, has a different degree of validity in dif- 
ferent countries ; depending on the degree of desuetude into 
which society has allowed a right to fall, which, no one can 
doubt, it once fully possessed. In countries of Europe, the 
right to take by taxation, as exigency might require, an in- 
definite portion of the rent of land, has never been allowed 
to slumber. In several parts of the Continent the land-tax 
forms a large proportion of the public revenues, and has 
always been confessedly liable to be raised or lowered with- 
out reference to other taxes. In these countries no one can 
pretend to have become the owner of land on the faith of 
never being called upon to pay an increased land-tax. In 
England the land-tax has not varied since the early part of 
the last century. The last act of the legislature in relation 
to its amount, was to diminish it : and though the subse- 
quent increase in the rental of the country has been im- 
mense, not only from agriculture, but from the growth of 
towns and the increase of buildings, the ascendancy of land- 
holders in the legislature has prevented any tax from being 
imposed, as it so justly might, upon the very large portion 
of this increase which was unearned, and, as it were, acci- 
dental. For the expectations thus raised, it appears to me 
that an amply sufficient allowance is made, if the whole in- 
crease of income which has accrued during this long period 
from a mere natural law, without exertion or sacrifice, is 
held sacred from any peculiar taxation. From the present 
date, or any subsequent time at which the legislature may 
think fit to assert the principle, I see no objection to declar- 
ing that the future increment of rent should be liable to 
special taxation ; in doing which all injustice to the land- 
lords would be obviated, if the present market-price of their 
land were secured to them ; since that includes the present 



414 BOOK V. CHAPTER II. §6. 

value of all future expectations. With reference to such a 
tax, perhaps a safer criterion than either a rise of rents or a 
rise of the price of corn, would be a general rise in the price 
of land. It would be easy to keep the tax within the 
amount which would reduce the market-value of land below 
the original valuation : and up to that point, whatever the 
amount of the tax might be, no injustice would be done to 
the proprietors. 

§ 6. But whatever may be thought of the legitimacy 
of making the State a sharer in all future increase of rent 
from natural causes, the existing land-tax (which in this 
country unfortunately is very small) ought not to be regarded 
as a tax, but as a rent-charge in favour of the public ; a por- 
tion of the rent, reserved from the beginning by the State, 
which has never belonged to or formed part of the income 
of the landlords, and should not therefore be counted to 
them as part of their taxation, so as to exempt them from 
their fair share of every other tax. As well might the tithe 
be regarded as a tax on the landlords : as well, in Bengal, 
where the State, though entitled to the whole rent of the 
land, gave away one-tenth of it to individuals, retaining the 
other nine-tenths, might those nine-tenths be considered as 
an unequal and unjust tax on the grantees of the tenth. 
That a person owns pp-rt of the rent, does not make the rest 
of it his just right, injuriously withheld from him. The 
landlords originally held their estates subject to feudal bur- 
dens, for which the present land-tax is an exceedingly small 
equivalent, and for their relief from which they should have 
been required to pay a much higher price. All who have 
bought land since the tax existed have bought it subject to 
the tax. There is not the smallest pretence for looking 
upon it as a payment exacted from the existing race of 
landlords. 

These observations are applicable to a land-tax, only in 
so far as it is a peculiar tax, and not when it is merely a 
mode of levying from the landlords the equivalent of what 



GENERAL PRINCIPLES OF TAXATION. 415 

is taken from other classes. In France, for example, there 
are peculiar taxes on other kinds of property and income 
(the mdbilier and the patente), and supposing the land-tax to 
be not more than equivalent to these, there would be no 
ground for contending that the state had reserved to itself a 
rent-charge on the land. But wherever and in so far as in- 
come derived from land is prescriptively subject to a deduc- 
tion for public purposes, beyond the rate of taxation levied 
on other incomes, the surplus is not properly taxation, but 
a share of the property in the soil, reserved by the state. In 
this country there are no peculiar taxes on other classes, 
corresponding to, or intended to countervail, the land-tax. 
The whole of it, therefore, is not taxation but a rent-charge, 
and is as if the state had retained, not a portion of the rent, 
but a portion of the land. It is no more a burden on the 
landlord, than the share of one joint tenant is a burden on 
the other. The landlords are entitled to no compensation 
for it, nor have they any claim to its being allowed for, as 
part of their taxes. Its continuance on the existing footing 
is no infringement of the principal of Equal Taxation.* 

We shall hereafter consider, in treating of Indirect Taxa- 
tion, how far, and with what modifications, the rule of equal- 
ity is applicable to that department. 

§ 7. In addition to the preceding rules, another gen- 
eral rule of taxation is sometimes laid down, namely, that it 
should fall on income, and not on capital. That taxation 
should not encroach upon the amount of the national capital, 
is indeed of the greatest importance ; but this encroachment, 
when it occurs, is not so much a consequence of any par- 



* The same remarks obviously apply to those local taxes, of the peculiar 
pressure of which on landed property so much has been said by the remuant of 
the Protectionists. As much of these burdens as is of old standing, ought to be 
regarded as a prescriptive deduction or reservation, for public purposes, of a 
portion of the rent. And any recent additions have either been incurred for the 
benefit of the owners of landed property, or occasioned by their fault : in neither 
case, giving them any just ground of complaint. 



416 BOOK V. CHAPTER II. §7. 

ticular mode of taxation, as of its excessive amount. Over- 
taxation, carried to a sufficient extent, is quite capable of 
ruining the most industrious community, especially when it 
is in any degree arbitrary, so that the payer is never certain 
how much or how little he shall be allowed to keep ; or 
when it is so laid on as to render industry and economy a 
bad calculation. But if these errors be avoided, and the 
amount of taxation be not greater than it is at present even 
in the most heavily taxed country of Europe, there is no 
danger lest it should deprive the country of a portion of its 
capital. 

To provide that taxation shall fall entirely on income, 
and not at all on capital, is beyond the power of any system 
of fiscal arrangements. There is no tax which is not partly 
paid from what would otherwise have been saved ; no tax, 
the amount of which, if remitted, would be wholly employed 
in increased expenditure, and no part whatever laid by as 
an addition to capital. All taxes, therefore, are in some 
sense partly paid out of capital ; and in a poor country it 
is impossible to impose any tax which will not impede the 
increase of the national wealth. But in a country where 
capital abounds and the spirit of accumulation is strong, 
this efi'ect of taxation is scarcely felt. Capital having 
reached the stage in which, were it not for a perpetual suc- 
cession of improvements in production, any further increase 
would soon be stopped — and having so strong a tendency 
even to outrun those improvements, that profits are only 
kept above the minimum by emigration of capital, or by a 
periodical sweep called a commercial crisis; to take from 
capital by taxation what emigration would remove, or a 
commercial crisis destroy, is only to do what either of those 
causes would have done, namely, to make a clear space for 
further saving. 

I cannot, therefore, attach any importance, in a wealthy 
country, to the objection made against taxes on legacies and 
inheritances, that they are taxes on capital. It is perfectly 
true that they are so. As Ricardo observes, if 1001. are 



GENERAL PRINCIPLES OF TAXATION. 417 

taken from any one in a tax on houses or on wine, he will 
probably save it, or a part of it, by living in a cheaper 
house, consuming less wine, or retrenching from some other 
of his expenses : but if the same sum be taken from him 
because he has received a legacy of 1000Z., he considers the 
legacy as only 900Z., and feels no more inducement than at 
any other time (probably feels rather less inducement) to 
economize in his expenditure. The tax, therefore, is wholly 
paid out of capital : and there are countries in which this 
would be a serious objection. But in the first place, the 
argument cannot apply to any country which has a national 
debt and devotes any portion of revenue to paying it off ; 
since the produce of the tax, thus applied, still remains 
capital, and is merely transferred from the tax-payer to the 
fundholder. But the objection is never applicable in a 
country which increases rapidly in wealth. The amount 
which would be derived, even from a very high legacy duty, 
in each year, is but a small fraction of the annual increase of 
capital in such a country ; and its abstraction would but 
make room for saving to an equivalent amount : while the 
effect of not taking it, is to prevent that amount of saving, 
or cause the savings when made, to be sent abroad for 
investment. A country which, like England, accumulates 
capital not only for itself, but for half the world, may be 
said to defray the whole of its public expenses from its 
overflowings ; and its wealth is probably at this moment as 
great as if it had no taxes at all. What its taxes really do 
is, to subtract from its means, not of production but of 
enjoyment ; since whatever any one pays in taxes, he could, 
if it were not taken for that purpose, employ in indulging 
his ea~e, or in gratifying some want or taste which at pres- 
ent remains unsatisfied. 



66 



CHAPTER in. 

OF DIRECT TAXES. 

§ 1. Taxes are either direct or indirect. A direct tax 
is one which is demanded from the very persons who, it is 
intended or desired, should pay it. Indirect taxes are those 
which are demanded from one person in the expectation and 
intention that he shall indemnify himself at the expense of 
another : such as the excise or customs. The producer or 
importer of a commodity is called upon to pay tax on it, 
not with the intention to levy a peculiar contribution upon 
him, hut to tax through him the consumers of the com- 
modity, from whom it is supposed that he will recover the 
amount by means of an advance in price. 

Direct taxes are either on income, or on expenditure. 
Most taxes on expenditure are indirect, but some are direct, 
being imposed, not on the producer or seller of an article, 
but immediately on the consumer. A house-tax, for exam- 
ple, is a direct tax on expenditure, if levied, as it usually 
is, on the occupier of the house. If levied on the builder 
or owner, it would be an indirect tax. A window tax is 
a direct tax on expenditure ; so are the taxes on horses 
and carriages, and the rest of what are called the assessed 
taxes. 

The sources of income are rent, profits, and wages. This 
includes every sort of income, except gift or plunder. Taxes 
may be laid on any one of the three kinds of income, or an 
uniform tax on all of them. . We will consider these in 
their order. 



DIRECT TAXES. 419 

§ 2. A tax on rent falls wholly on the landlord. There 
are no means by which he can shift the burden upon any 
one else. It does not affect the value or price of agricultural 
produce, for this is determined by the cost of production in 
the most unfavourable circumstances, and in those circum- 
stances, as we have so often demonstrated, no rent is paid. 
A tax on rent, therefore, has no effect, other than its obvious 
odc It merely takes so much from the landlord, and trans- 
fers it to the state. 

This, however, is, in strict exactness, only true of the 
rent which is the result either of natural causes, or of im- 
provements made by tenants. When the landlord makes 
improvements which increase the productive power of his 
land, he is remunerated for them by an extra payment from 
the tenant ; and this payment, which to the landlord is prop- 
erly a profit on capital, is blended and confounded with rent ; 
which indeed it really is, to the tenant, and in respect of the 
economical laws which determine its amount. A tax on rent, 
if extending to this portion of it, would discourage landlords 
from making improvements : but it does not follow that it 
would raise the price of agricultural produce. The same 
improvements might be made with the tenant's capital, or 
even with the landlord's if lent by him to the tenant ; pro- 
vided he is willing to give the tenant so long a lease as will 
enable him to indemnify himself before it expires. But 
whatever hinders improvements from being made in the 
manner in which people prefer to make them, will often pre- 
vent them from being made at all : and on this account a 
tax on rent would be inexpedient unless some means could 
be devised of excluding from its operation that portion of the 
nominal rent which may be regarded as landlord's profit. This 
argument, however, is not needed for the condemnation of 
such a tax. A peculiar tax on the income of any class, not 
balanced by taxes on other classes, is a violation of justice, and 
amounts to a partial confiscation. I have already shown 
grounds for excepting from this censure a tax which, sparing 
existing rents, should content itself with appropriating a por- 



420 BOOK V. CHAPTER III. §3. 

tion of any future increase arising from the mere action of 
natural causes. But even this could not be justly done, with- 
out offering as an alternative the market price of the land. In 
the case of a tax on rent which is not peculiar, but accom- 
panied by an equivalent tax on other incomes, the objec- 
tion grounded on its reaching the profit arising from im* 
provements is less applicable : since, profits being taxed as 
well as rent, the profit which assumes the form of rent is 
liable to its share in common with other profits ; but since 
profits altogether ought, for reasons formerly stated, to be 
taxed somewhat lower than rent properly so called, the ob- 
jection is only diminished, not removed. 

§ 3. A tax on profits, like a tax on rent, must, at least 
in its immediate operation, fall wholly on the payer. All 
profits being alike affected, no relief can be obtained by 
a change of employment. If a tax were laid on the profits 
of any one branch of productive employment, the tax would 
be virtually an increase of the cost of production, and the 
value and price of the article would rise accordingly ; by 
which the tax would be thrown upon the consumers of the 
commodity, and would not affect profits. But a general 
and equal tax on all profits would not affect general prices, 
and would fall, at least in the first instance, on capitalists 
alone. 

There is, however, an ulterior effect, which, in a rich and 
prosperous country, requires to be taken into account. 
When the capital accumulated is so great and the rate of 
annual accumulation so rapid, that the country is only kept 
from attaining the stationary state by the emigration of 
capital, or by continual improvements in production ; any 
circumstance which virtually lowers the rate of profit, can- 
not be without a decided influence on these phenomena. 
It may operate in different ways. The curtailment of 
profit, and the consequent increased difficulty in making a 
fortune or obtaining a subsistence by the employment of 
capital, may act as a stimulus to inventions, and to the use 



DIRECT TAXES. 421 

of them when made. If improvements in production are 
much accelerated, and if these improvements cheapen, 
directly or indirectly, any of the things habitually con- 
sumed by the labourer, profits may rise, and rise sufficient- 
ly to make up for all that is taken from them by the tax. 
In that case the tax will have been realized without loss to 
any one, the produce of the country being increased by an 
equal, or what would in that case be a far greater amount. 
The tax, however, must even in this case be considered as 
paid from profits, because the receivers of profits are those 
who would be benefited if it were taken off. 

But though the artificial abstraction of a portion of prof- 
its would have a real tendency to accelerate improvements 
in production, no considerable improvements might actually 
result, or only of such a kind as not to raise general profits 
at all, or not to raise them so much as the tax had dimin- 
ished them. If so, the rate of profit would be brought 
closer to that practical minimum, to which it is constantly 
approaching : and this diminished return to capital would 
either give a decided check to further accumulation, or 
would cause a greater proportion than before of the annual 
increase to be sent abroad, or wasted in unprofitable specu- 
lations^At its first imposition the tax falls wholly on prof- 
its : but the amount of increase of capital, which the tax 
prevents, would, if it had been allowed to continue, have 
tended to reduce profits to the same level ; and at every 
period of ten or twenty years there will be found less differ- 
ence between profits as they are, and profits as they would 
in that case have been : until at last there is no difference, 
and the tax is thrown either upon the labourer or upon the 
landlord. The real effect of a tax on profits is to make the 
country possess at any given period, a smaller capital and a 
smaller aggregate production, and to make the stationary 
state be attained earlier, and with a smaller sum of national 
wealth.. It is possible that a tax on profits might even 
diminish the existing capital of the country. If the rate of 
profit is already at the practical minimum, that is, at the 



422 BOOK V. CHAPTER III. §3. 

point at which all that portion of the annual increment 
which would tend to reduce profits is carried off either by 
exportation or by speculation ; then if a tax is imposed which 
reduces profits still lower, the same causes which previously 
carried off the increase would probably carry off a portion of 
the existing capital. A tax on profits is thus, in a state of 
capital and accumulation like that in England, extremely 
detrimental to the national wealth. And this effect is not 
confined to the case of a peculiar, and therefore intrinsically 
unjust, tax on profits. The mere fact that profits have to 
bear their share of a heavy general taxation, tends, in the 
same manner as a peculiar tax, to drive capital abroad, to 
stimulate imprudent speculations by diminishing safe gains, 
to discourage further accumulation, and to accelerate the 
attainment of the stationary state. This is thought to have 
been the principal cause of the decline of Holland, or rather 
of her having ceased to make progress. 

Even in countries which do not accumulate so fast as to 
be always within a short interval of the stationary state, it 
seems impossible that, if capital is accumulating at all, its 
accumulation should not be in some degree retarded by the 
abstraction of a portion of its profit ; and unless the effect in 
stimulating improvements be a full counterbalance, it is 
inevitable that a part of the burden will be thrown off the 
capitalist, upon the labourer or the landlord. One or other 
of these is always the loser by a diminished rate of accumu- 
lation. If population continues to increase as before, the 
labourer suffers : if not, cultivation is checked in its advance, 
and the landlords lose the accession of rent which would 
have accrued to them. The only countries in which a tax on 
profits seems likely to be permanently a burden on capital- 
ists exclusively, are those in which capital is stationary, 
because there is no new accumulation. In such countries 
the tax might not prevent the old capital from being kept 
up through habit, or from unwillingness to submit to im- 
poverishment, and so the capitalists might continue to bear 
the whole of the tax. It is seen from these considerations 



DIRECT TAXES. 423 

that the effects of a tax on profits are much more complex 
more various, and in some points more uncertain, than 
writers on the subject have commonly supposed. 

§ 4. We now turn to Taxes on "Wages. The incidence 
of these is very different, according as the wages taxed are 
those of ordinary unskilled labour, or are the remuneration of 
such skilled or privileged employments, whether manual or 
intellectual, as are taken out of the sphere of competition by 
a natural or conferred monopoly. 

I have already remarked, that in the present low state 
of popular education, all the higher grades of mental or edu- 
cated labour are at a monopoly price ; exceeding the wages 
of common workmen in a degree very far beyond that which 
is due to the expense, trouble, and loss of time required in 
qualifying for the employment. Any tax levied on these 
gains which still leaves them above (or not below) their just 
proportion, falls on those who pay it ; they have no means 
of relieving themselves at the expense of any other class. 
The same thing is true of ordinary wages, in cases like that 
of the United States, or of a new colony, where, capital in- 
creasing as rapidly as population can increase, wages are 
kept up by the increase of capital, and not by the adherence 
of the labourers to a fixed standard of comforts. In such a 
case, some deterioration of their condition, whether by a tax 
or otherwise, might possibly take place without checking 
the increase of population. The tax would in that case fall 
on the labourers themselves, and would reduce them pre- 
maturely to that lower state to which, on the same supposi- 
tion with regard to their habits, they would in any case have 
been reduced ultimately, by the inevitable diminution in the 
rate of increase of capital, through the occupation of all the 
fertile land. 

Some will object that, even in this case, a tax on wages 
cannot be detrimental to the labourers, since the money 
raised by it, being expended in the country, comes back to 
the labourers again through the demand for labour. The 



424 B 0K v - CHAPTER III. §4. 

fallacy, however, of this doctrine has been so completely 
exhibited in the First Book,* that I need do little more than 
refer to that exposition. It was there shown that funds ex- 
pended unproductively have no tendency to raise or keep 
up wages, unless when expended in the direct purchase of 
labour. If the government took a tax of a shilling a weelc 
from every labourer, and laid it all out in hiring labourers 
for military service, public works, or the like, it would no 
doubt, indemnify the labourers as a class for all that the tax 
took from them. That would really be " spending the mon- 
ey among the people." But if it expended the whole in 
buying goods, or in adding to the salaries of employes who 
bought goods with it, this would not increase the demand 
for labour, or tend to raise wages. Without, however, 
reverting to general principles, we may rely on an ob- 
vious reductio ad absurdum. If to take money from the 
labourers and spend it in commodities is giving it back to 
the labourers, then, to take money from other classes, and 
spend it in the same manner, must be giving it to the la- 
bourers ; consequently, the more a government takes in 
taxes, the greater will be the demand for labour, and the 
more opulent the condition of the labourers. A proposition 
the absurdity of which no one can fail to see. 

In the condition of most communities, wages are regu- 
lated by the habitual standard of living to which the la- 
bourers adhere, and on less than which they will not multi- 
ply. Where there exists such a standard, a tax on wages 
will indeed for a time be borne by the labourers them- 
selves ; but unless this temporary depression has the effect 
of lowering the standard itself, the increase of population 
will receive a check, which will raise wages, and restore the 
labourers to their previous condition. On whom, in this 
case, will the tax fall ? According to Adam Smith, on the 
community generally, in their character of consumers ; 
since the rise of wages, he thought, would raise general 
prices. We have seen, however, that general prices depend 

* Supra, vol. i. pp. 114-124. 



DIRECT TAXES. 425 

on other causes, and are never raised by any circumstance 
which affects all kinds of productive employment in the 
same manner and degree. A rise of wages occasioned by a 
tax, must, like any other increase of the cost of labour, be 
defrayed from profits. To attempt to tax day-labourers, in 
an old country, is merely to impose an extra tax upon all 
employers of common labour ; unless the tax has the much 
worse effect of permanently lowering the standard of com- 
fortable subsistence in the minds of the poorest class. 

We find in the preceding considerations an additional 
argument for the opinion already expressed, that direct tax- 
ation should stop short of the class of incomes which do not 
exceed what is necessary for healthful existence. These 
very small incomes are mostly derived from manual labour ; 
and, as we now see, any tax imposed on these, either per- 
manently degrades the habits of the labouring class, or falls 
on profits, and burdens capitalists with an indirect tax, in 
addition to their share of the direct taxes ; which is doubly 
objectionable, both as a violation of the fundamental rule of 
equality, and for the reasons which, as already shown, render 
a peculiar tax on profits detrimental to the public wealth, 
and consequently to the means which society possesses of 
paying any taxes whatever. 

§ 5. We now pass, from taxes on the separate kinds 
of income, to a tax attempted to be assessed fairly upon all 
kinds ; in other words, an Income Tax. The discussion of 
the conditions necessary for making this tax consistent with 
justice, has been anticipated in the last chapter. We shall 
suppose, therefore, that these conditions are complied with. 
They are, first, that incomes below a certain amount should 
be altogether untaxed. This minimum should not be higher 
than the amount which suffices for the necessaries of the 
existing population. The exemption from the present income- 
tax, of all incomes under 1001. a-year, and the lower per- 
centage levied on those between 1001. and 1501., are only 
defensible on the ground that almost all the indirect taxes 



426 BOOK V. CHAPTER III. §5. 

press more heavily on incomes between 501. and 1501. than 
on any others whatever. The second condition is, that 
incomes above the limit should be taxed only in proportion 
to the surplus by which they exceed the limit. Thirdly, 
that all sums saved from income and invested, should be ex- 
empt from the tax : or if this be found impracticable, that 
life incomes and incomes from business and professions 
should be less heavily taxed than inheritable incomes, in a 
degree as nearly as possible equivalent to the increased need 
of economy arising from their terminable character : allow- 
ance being also made, in the case of variable incomes, for 
their precariousness. 

An income-tax, fairly assessed on these principles, would 
be, in point of justice, the least exceptionable of all taxes. 
The objection to it, in the present low state of public morality, 
is the impossibility of ascertaining the real incomes of the 
contributors. The supposed hardship of compelling people 
to disclose the amount of their incomes, ought not in my 
opinion, to count for much. One of the social evils of this 
country is the practice, amounting to a custom, of maintain- 
ing, or attempting to maintain, the appearance to the world 
of a larger income than is possessed ; and it would be far bet- 
ter for the interests of those who yield to this weakness, if the 
extent of their means were universally and exactly known, 
and the temptation removed to expending more than they 
can afford, or stinting real wants in order to make a false 
show externally. At the same time, the reason of the case, 
even on this point, is not so exclusively on one side of the 
argument as is sometimes supposed. So long as the vulgar 
of any country are in the debased state of mind which this 
national habit presupposes — so long as their respect (if such 
a word can be applied to it) is proportioned to what they sup- 
pose to be each person's pecuniary means — it may be doubted 
whether anything which would remove all uncertainty as to 
that point, would not considerably increase the presumption 
and arrogance of the vulgar rich, and their insolence towards 



DIRECT TAXES. 427 

those above them in mind and character, but below them in 
fortune. 

Notwithstanding, too, what is called the inquisitorial 
nature of the tax, no amount of inquisitorial power which 
would be tolerated by a people the most disposed to submit 
to it, could enable the revenue officers to assess the tax from 
actual knowledge of the circumstances of contributors. 
Rents, salaries, annuities, and all fixed incomes, can be ex- 
actly ascertained. But the variable gains of professions, and 
still more the profits of business, which the person interested 
cannot always himself exactly ascertain, can still less be 
estimated with any approach to fairness by a tax collector. 
The main reliance must be placed, and always has been 
placed, on the returns made by the person himself. No 
production of accounts is of much avail, except against the 
more flagrant cases of falsehood ; and even against these the 
check is very imperfect, for if fraud is intended, false ac- 
counts can generally be framed which it will baffle any 
means of inquiry possessed by the revenue officers to detect : 
the easy resource of omitting entries on the credit side being 
often sufficient without the aid of fictitious debts or dis- 
bursements. The tax, therefore, on whatever principles of 
equality it may be imposed, is in practice unequal in one of 
the worst ways, falling heaviest on the most conscientious. 
The unscrupulous succeed in evading a great proportion of 
what they should pay ; even persons of integrity in their 
ordinary transactions are tempted to palter with their con- 
sciences, at least to the extent of deciding in their own fa- 
vour all points on which the smallest doubt or discussion 
could arise : while the strictly veracious may be made to 
pay more than the state intended, by the powers of arbitrary 
assessment necessarily intrusted to the Commissioners as 
the last defence against the tax-payer's power of conceal- 
ment. 

It is to be feared, therefore, that the fairness which be- 
longs to the principle of an income-tax, cannot be made to 
attach to it in practice : and that this tax, while apparently 



428 B00K v - CHAPTER III. §5. 

the most just of all modes of raising a revenue, is in effect 
more unjust than many others which are prima facie 
more objectionable. This consideration would lead us to 
concur in the opinion which, until of late, has usually pre- 
vailed — that direct taxes on income should be reserved as 
an extraordinary resource for great national emergencies, in 
which the necessity of a large additional revenue overrule? 
all objections. 

The difficulties of a fair income-tax have elicited a prop- 
osition for a direct tax of so much per cent., not on income 
but on expenditure ; the aggregate amount of each person's 
expenditure being ascertained as the amount of income now 
is, from statements furnished by the contributors themselves. 
The author of this suggestion, Mr. Revans, in a clever pam- 
phlet on the subject,* contends that the returns which per- 
sons would furnish of their expenditure would be more 
trustworthy than those which they now make of their income, 
inasmuch as expenditure is in its own nature more public 
than income, and false representations of it more easily de- 
tected. He cannot, I think, have sufficiently considered, 
how few of the items in the annual expenditure of most 
families can be judged of with any approximation to correct- 
ness from the external signs. The only security would still • 
be the veracity of individuals, and there is no reason for 
supposing that their statements would be more trustworthy 
on the subject of their expenses than on that of their reve- 
nues ; especially as, the expenditure of most persons being 
composed of many more items than their income, there 
would be more scope for concealment and suppression in 
the detail of expenses than even of receipts. 

The taxes on expenditure at present in force, either in 
this or in other countries, fall only on particular kinds of 
expenditure, and differ no otherwise from taxes on com- 
modities than in being paid directly by the person who con- 
sumes or uses the article, instead of being advanced by the 

* " A Percentage Tax on Domestic Expenditure to supply the whole of the 
Public Revenue." By John Revans. Published by HuU-hard, in 1847. 



DIRECT TAXES. 420 

producer or seller, and reimbursed in the price. The taxes 
on horses and carriages, on dogs, on servants, are of this 
nature. They evidently fall on the persons from whom they 
are levied — those who use the commodity taxed. A tax of 
a similar description, and more important, is a house-tax : 
which must be considered at somewhat greater length. 

§ 6. The rent of a house consists of two parts, the 
ground-rent, and what Adam Smith calls the building-rent. 
The first is determined by the ordinary principles of rent. 
It is the remuneration given for the use of the portion of 
land occupied by the house and its appurtenances ; and 
varies from a mere equivalent for the rent which the 
ground would afford in agriculture, to the monopoly rents 
paid for advantageous situations in populous thoroughfares. 
The rent of the house itself, as distinguished from the ground, 
is the equivalent given for the labour and capital expended 
on the building. The fact of its being received in quarter- 
ly or half-yearly payments, makes no difference in the princi- 
ples by which it is regulated. It comprises the ordinary pro- 
fit on the builder's capital, and an annuity, sufficient at the 
current rate of interest, after paying for all repairs charge- 
able on the proprietor, to replace the original capital by the 
time the house is worn out, or by the expiration of the usual 
term of a building lease. 

A tax of so much per cent, on the gross rent, falls on both 
those portions alike. The more highly a house is rented, the 
more it pays to the tax, whether the quality of the situation 
or that of the house itself is the cause. The incidence, how- 
ever, of these two portions of the tax must be considered 
separately. 

As much of it as is a tax on building-rent, must ultimate- 
ly fall on the consumer, in other words the occupier. For as 
the profits of building are already not ab^ve the ordinary 
rate, they would, if the tax fell on the owner and not on the 
occupier, become lower than the profits of untaxed employ- 
ments, and houses would not be built. It is probable how- 



430 BOOK V. CHAPTER III. §6. 

ever that for some time after the tax was first imposed, a 
great part of it would fall, not on the renter, but on the 
owner of the house. A large proportion of the consumers 
either could not afford, or would not choose, to pay their 
former rent with the tax in addition, but would content 
themselves with a lower scale of accommodation. Houses 
therefore would be for a time in excess of the demand. The 
consequence of such excess, in the case of most other articles, 
would be an almost immediate diminution of the supply : 
but so durable a commodity as houses does not rapidly dimin- 
ish in amount. ISTew buildings indeed, of the class for which 
the demand had decreased, would cease to be erected, except 
for special reasons ; but in the meantime the temporary 
superfluity would lower rents, and the consumers would 
obtain, perhaps, nearly the same accommodation as formerly, 
for the same aggregate payment, rent and tax together. By 
degrees, however, as the existing houses wore out, or as 
increase of population demanded a greater supply, rents 
would again rise ; until it became profitable to recom- 
mence building, which would not be until the tax was 
wholly transferred to the occupier. In the end, therefore, 
the occupier bears that portion of a tax on rent, which falls 
on the payment made for the house itself, exclusively of the 
ground it stands on. 

The case is partly different with the portion which is a 
tax on ground-rent. As taxes on rent, properly so called, 
fall on the landlord, a tax on ground-rent, one would sup- 
pose, must fall on the ground-landlord, at least after the 
expiration of the building lease. It will not however fall 
wholly on the landlord, unless with the tax on ground-rent 
there is combined an equivalent tax on agricultural rent. 
The lowest rent of land let for building is very little above 
the rent which the same ground would yield in agriculture : 
since it is reasonable to suppose that land, unless in case of 
exceptional circumstances, is let or sold for building as soon 
as it is decidedly worth more for that purpose than for culti- 
vation. If, therefore, a tax were laid on ground-rents without 



DIRECT TAXES. 431 

being also laid on agricultural rents, it would, unless of 
trifling amount, reduce the return from the lowest ground- 
rents below the ordinary return from land, and would check 
further building quite as effectually as if it were a tax on 
building-rents, until either the increased demand of a grow- 
ing population, or a diminution of supply by the ordinary 
causes of destruction, had raised the rent by a full equivalent 
for the tax. But whatever raises the lowest ground-rents, 
raises all others, since each exceeds the lowest by the market 
value of its peculiar advantages. If, therefore, the tax on 
ground-rents were a fixed sum per square foot, the more 
valuable situations paying no more than those least in request, 
this fixed payment would ultimately fall on the occupier. 
Suppose the lowest ground-rent to be 101. per acre, and the 
highest 1000£., a tax of 11. per acre on ground-rents would 
ultimately raise the former to 111., and the latter conse- 
quently to 1001Z., since the difference of value between the 
two situations would be exactly What it was before : the 
annual pound, therefore, would be paid by the occupier. 
But a tax on ground-rent is supposed to be a portion of a 
house-tax which is not a fixed payment, but a percentage on 
the rent. The cheapest site, therefore, being supposed as 
before to pay 11., the dearest would pay 1001., of which only 
the 11. could be thrown upon the occupier, since the rent 
would still be only raised to 1001Z. Consequently, 99Z. of 
the 1001. levied from the expensive site, would fall on the 
ground-landlord. A house-tax thus requires to be considered 
in a double aspect, as a tax on all occupiers of houses, and 
a tax on ground-rents. 

In the vast majority of houses, the ground-rent forms 
but a small proportion of the annual payment made for the 
house, and nearly all the tax falls on the occupier. It is only 
in exceptional cases, like that of the favourite situations in 
large towns, that the predominant element in the rent of the 
house is the ground-rent ; and among the very few kinds of 
income which are fit subjects for peculiar taxation, these 
ground-rents hold the principal place, being the most gigan- 



432 BOOK V. CHAPTER III. §6. 

tic example extant of enormous accessions of riches acquired 
rapidly, and in many cases unexpectedly, by a few families, 
from the mere accident of their possessing certain tracts of 
land, without their having themselves aided in the acquisi- 
tion by the smallest exertion, outlay, or risk. So far there- 
fore as a house-tax falls on the ground-landlord, it is liable 
to no valid objection. 

In so far as it falls on the occupier, if justly proportioned 
to the value of the house, it is one of the fairest and most 
unobjectionable of all taxes. No part of a person's expend- 
iture is a better criterion of his means, or bears, on the 
whole, more nearly the same proportion to them, A house- 
tax is a nearer approach to a fair income-tax, than a direct 
assessment on income can easily be ; having the great 
advantage, that it makes spontaneously all the allowances 
which it is so difficult to make, and so impracticable to make 
exactly, in assessing an income-tax : for if what a person 
pays in house-rent is a test of anything, it is a test not of 
what he possesses, but of what he thinks he can afford to 
spend. The equality of this tax can only be seriously ques- 
tioned on two grounds. The first is, that a miser may escape 
it. This objection applies to all taxes on expenditure : noth- 
ing but a direct tax on income can reach a miser. But as 
misers do not now hoard their treasure, but invest it in 
productive employments, it not only adds to the national 
wealth, and consequently to the general means of paying 
taxes, but the payment claimable from itself is only trans- 
ferred from the principal sum to the income afterwards 
derived from it, which pays taxes as soon as it comes to be 
expended. The second objection is that a person may re 
quire a larger and. more expensive house, not from having 
greater means, but from having a larger family. Of this, 
however, he is not entitled to complain ; since having a 
large family is at a person's own choice : and, so far as con- 
cerns the public interest, is a thing rather to be discouraged 
than promoted.* 

* Another common objection is that large and expensive accommodation is 
often required, not as a residence, but for business. But it is an admitted prin- 



DIRECT TAXES. 433 

A large portion of the taxation of this country is rais- 
ed by a house-tax. The parochial taxation of the towns 
entirely, and of the rural districts partially, consists of an 
assessment on house-rent. The window-tax, which was 
also a house-tax, but of a bad kind, operating as a tax on 
light, and a cause of deformity in building, was exchanged 
in 1851 for a house-tax properly so-called, but on a much 
lower scale than that which existed previously to 1834. It 
is to be lamented that the new tax retains the unjust princi- 
ple on which the old house-tax was assessed, and which con- 
tributed quite as much as the selfishness of the middle classes 
to produce the outcry against the tax. The public were 
justly scandalized on learning that residences like Chatsworth 
or Belvoir were only rated on an imaginary rent of perhaps 
2001. a year, under the pretext that owing to the great ex- 
pense of keeping them up, they could not be let for more. 
Probably, indeed, they could not be let even for that, and if 
the argument were a fair one, they ought not to have been 
taxed at all. But a house-tax is not intended as a tax on 
incomes derived from houses, but on expenditure incurred 
for them. The thing which it is wished to ascertain is what 

ciple that buildings or portions of buildings occupied exclusively for business, 
such as shops, warehouses, or manufactories, ought to be exempted from house- 
tax. The plea that persons in business may be compelled to live in situations, 
such as the great thoroughfares of London, where house-rent is at a monopoly 
rate, seems to me unworthy of regard : since no one does so but because the 
extra profit which he expects to derive from the situation, is more than an equiv- 
alent to him for the extra cost. But in any case, the bulk of the tax on this 
extra rent will not fall on him, but on the ground-landlord. 

It has been also objected that house-rent in the rural districts is much lower 
than in towns, and lower in some towns and in some rural districts than in 
others : so that a tax proportioned to it would have a corresponding inequality 
of pressure. To this, however, it may be answered, that in places where house- 
rent is low, persons of the same amount of income usually live in larger and 
better houses, and thus expend in house-rent more nearly the same proportion 
of their incomes than might at first sight appear. Or if not, the probability will 
be, that many of them live in those places precisely because they are too poor to 
live elsewhere, and have therefore the strongest claim to be taxed lightly. In 
some cases, it is precisely because the people are poor, that house-rent remains 
low. 

<57 



434: BOOK V. CHAPTER in. §6. 

a house costs to the person who lives in it, not what it 
would bring in if let to some one else. When the occupier 
is not the owner, and does not hold on a repairing lease, 
the rent he pays is the measure of what the house costs him : 
but when he is the owner, some other measure must be 
sought. A valuation should be made of the house, not at 
what it would sell for, but at what would be the cost of 
rebuilding it, and this valuation might be periodically cor- 
rected by an allowance for what it had lost in value by 
time, or gained by repairs and improvements. The amount 
of the amended valuation would form a principal sum, the 
interest of which, at the current price of the public funds, 
would form the annual value at which the building should 
be assessed to the tax. 

As incomes below a certain amount ought to be exempt 
from income-tax, so ought houses below a certain value, 
from house-tax, on the universal principle of sparing 
from all taxation the absolute necessaries of healthful exist- 
ence. In order that the occupiers of lodgings, as well as 
of houses, might benefit, as in justice they ought, by this 
exemption, it might be optional with the owners to have 
every portion of a house which is occupied by a separate 
tenant, valued and assessed separately, as is now usually the 
case with chambers. 



CHAPTER IV. 

OF TAXES ON COMMODITIES. 

§ 1. By taxes on commodities are commonly meant, 
those which are levied either on the producers, or on the 
carriers or dealers who intervene between them and the final 
purchasers for consumption. Taxes imposed directly on the 
consumers of particular commodities, such as a house-tax, or 
the tax in this country on horses and carriages, might be 
called taxes on commodities, but are not ; the phrase being, 
by custom, confined to indirect taxes — those which are ad- 
vanced by one person, to be, as is expected and intended, 
reimbursed by another. Taxes on commodities are either 
on production within the country, or on importation into it, 
or on conveyance or sale within it ; and are classed respect- 
ively as excise, customs, or tolls and transit duties. To 
whichever class they belong, and at whatever stage in the 
progress of the community they may be imposed, they are 
equivalent to an increase of the cost of production ; using that 
term in its most enlarged sense, which includes the cost of 
transport and distribution, or, in common phrase, of bringing 
the commodity to market. 

When the cost of production is increased artificially by a 
tax, the effect is the same as when it is increased by natural 
causes. If only one or a few commodities are affected, their 
value and price rise, so as to compensate the producer or 
dealer for the peculiar burden ; but if there were a tax on 
all commodities, exactly proportioned to their value, no such 
compensation would be obtained : there would neither be a 



436 BOOK V. CHAPTER IV. §2. 

general rise of values, which is an absurdity, nor of prices, 
which depend on causes entirely different. There would, 
however, as Mr. M'Culloch has pointed out, be a disturbance 
of values, some falling, others rising, owing to a circum- 
stance, the effect of which on values and prices we formerly 
discussed ; the different durability of the capital employed in 
different occupations. The gross produce of industry consists 
of two parts ; one portion serving to replace the capital con- 
sumed, while the other portion is profit. Now equal capital 
in two branches of production must have equal expectations 
of profit ; but if a greater portion of the one than of the other 
is fixed capital, or if that fixed capital is more durable, there 
will be a less consumption of capital in the year, and less 
will be required to replace it, so that the profit, if abso- 
lutely the same, will form a greater proportion of the annual 
returns. To derive from a capital of 1000?. a profit of 100?., 
the one producer may have to sell produce to the value of 
1100?., the other only to the value of 500?. If on these two 
branches of industry a tax be imposed of five per cent, ad 
valorem, the last will be charged only with 25?., the first with 
55?. ; leaving to the one 75?. profit, to the other only 45?. 
To equalize, therefore, their expectation of profit, the one 
commodity must rise in price, or the other must fall, or both : 
commodities made chiefly by immediate labour must rise in 
value, as compared with those which are chiefly made by 
machinery. It is unnecessary to prosecute this branch of 
the inquiry any further. 

§ 2. A tax on any one commodity, whether laid on its 
production, its importation, its carriage from place to place, 
or its sale, and whether the tax be a fixed sum of money for 
a given quantity of the commodity, or an ad valorem duty, 
will, as a general rule, raise the value and price of the com- 
modity by at least the amount of the tax. There are few 
cases in which it does not raise them by more than that 
amount. In the first place, there are few taxes on produc- 
tion on account of which it is not found or deemed neces- 



TAXES ON COMMODITIES. 437 

sary to impose restrictive regulations on the manufacturers or 
dealers, in order to check evasions of the tax. These regu- 
lations are always sources of trouble and annoyance, and 
generally of expense, for all of which, being peculiar disad- 
vantages, the producers or dealers must have compensation 
in the price of their commodity. These restrictions also fre- 
quently interfere with the processes of manufacture, requir- 
ing the producer to carry on his operations in the way most 
convenient to the revenue, though not the cheapest or most 
efficient for purposes of production. Any regulations what- 
ever, enforced by law. make it difficult for the producer to 
adopt new and improved processes. Further, the necessity 
of advancing the tax obliges producers and dealers to carry 
on their business with larger capitals than would otherwise 
be necessary, on the whole of which they must receive the 
ordinary rate of profit, though a part only is employed in 
defraying the real expenses of production or importation. 
The price of the article must be such as to afford a profit on 
more than its natural value, instead of a profit on only its 
natural value. A part of the capital of the country, in short, 
is not employed in production, but in advances to the state, 
repaid in the price of goods ; and the consumers must give 
an indemnity to the sellers, equal to the profit which they 
could have made on the same capital if really employed in 
production. Neither ought it to be forgotten, that whatever 
renders a larger capital necessary in any trade or business, 
limits the competition in that business ; and by giving some- 
thing like a monopoly to a few dealers, may enable them 
either to keep up the price beyond what would afford the 
ordinary rate of profit, or to obtain the ordinary rate of 
profit with a less degree of exertion for improving and 
cheapening their commodity. In these several modes, 
taxes on commodities often cost to the consumer, through 
the increased price of the article, much more than they 
bring into the treasury of the state. There is still another 
consideration. The higher price necessitated by the tax, 
almost always checks the demand for the commodity ; and 



438 BOOK V. CHAPTER IV. §3. 

since there are many improvements in production which, 
to make them practicable, require a certain extent of 
demand, such improvements are obstructed, and many of 
them prevented altogether. It is a well-known fact, that 
the branches of production in which fewest improvements 
are made, are those with which the revenue officer inter- 
feres ; and that nothing, in general, gives a greater impulse 
to improvements in the production of a commodity, than 
taking off a tax which narrowed the market for it. 

§ 3. Such are the effects of taxes on commodities, con- 
sidered generally ; but as there are some commodities (those 
composing the necessaries of the labourer) of which the 
values have an influence on the distribution of wealth among 
different classes of the community, it is requisite to trace 
the effects of taxes on those particular articles somewhat 
farther. If a tax be laid, say on corn, and the price rises in 
proportion to the tax, the rise of price may operate in two 
ways. First : it may lower the condition of the labouring 
classes ; temporarily indeed it can scarcely fail to do so. 
If it diminishes their consumption of the produce of the 
earth, or makes them resort to a food which the soil pro- 
duces more abundantly, and therefore more cheaply, it to 
that extent contributes to throw back agriculture upon more 
fertile lands or less costly processes, and to lower the value 
and price of corn ; which therefore ultimately settles at a 
price, increased not by the whole amount of the tax, but by 
only a part of its amount. Secondly, however, it may hap- 
pen that the dearness of the taxed food does not lower the 
habitual standard of the labourer's requirements, but that 
wages, on the contrary, through an action on population, 
rise, in a shorter or longer period, so as to compensate the 
labourers for their portion of the tax ; the compensation 
being of course at the expense of profits. Taxes on necessa- 
ries must thus have one of two effects. Either they lower 
the condition of the labouring classes ; or they exact from 
the owners of capital, in addition to the amount due to the 



TAXES ON COMMODITIES. 439 

state on their own necessaries, the amount due on those 
consumed by the labourers. In the last case, the tax on 
necessaries, like a tax on wages, is equivalent to a peculiar 
tax on profits ; which is, like all other partial taxation, 
unjust, and is specially prejudicial to the increase of the 
national wealth. 

It remains to speak of the effect on rent. Assuming 
(what is usually the fact,) that the consumption of food is 
not diminished, the same cultivation as before will be neces- 
sary to supply the wants of the community ; the margin of 
cultivation, to use Dr. Chalmers' expression, remains where 
it was ; and the same land or capital which, as the least 
productive, already regulated the value and price of the 
whole produce, will continue to regulate them. The effect 
which a tax on agricultural produce will have on rent, 
depends on its affecting or not affecting the difference 
between the return to this least productive land or capital, 
and the returns to other lands and capitals. Now this 
depends on the manner in which the tax is imposed. If 
it is an ad valorem tax, or what is the same thing, a fixed 
proportion of the produce, such as tithe for example, it 
evidently lowers corn-rents. For it takes more corn from 
the better lands than from the worse ; and exactly in the 
degree in which they are better ; land of twice the produc- 
tiveness paying twice as much to the tithe. Whatever takes 
more from the greater of two quantities than from the less, 
diminishes the difference between them. The imposition of 
a tithe on corn would take a tithe also from corn-rent : for 
if we reduce a series of numbers by a tenth each, the differ- 
ences between them are reduced one-tenth. 

, For example, let there be five qualities of land, which 
severally yield, on the same extent of ground and with the 
same expenditiure, 100, 90, 80, TO, and 60 bushels of wheat ; 
the last of these being the lowest quality which the demand 
for food renders it necessary to cultivate. The rent of these 
lands will be as follows ; — 



440 BOOK V. CHAPTER IV. §3. 

The land ) , ) will yield ) , „ ,„ , . , 

, . }■ 100 bushels } \ e } 100-60, or 40 bushels, 

producing ) ) a rent ol ) 

That producing 90 „ „ 90—60, or 30 „ 

„ 80 „ „ 80-60, or 20 „ 

„ 70 „ „ 70-60, or 10 „ 

60 „ „ no rent. 

Now let a tithe be imposed, which takes from these five 
pieces of land 10, 9, 8, 7, and 6 bushels respectively, the fifth 
quality still being the one which regulates the price, but 
returning to the farmer, after payment of tithe, no more 
than 54 bushels : — 

e an i 10Q buglie i s re( j uce d to 90 ) m y * e (. 90—54, or 36 bushels, 

producing ) ( a rent 01 ) 

That ) 
producing I 9 ° » » 81 » 81-54, or 27 „ 

80 ,, „ 72 „ 72-54, or 18 „ 

„ 70 „ „ 63 „ 63— 54, or 9 „ 

and that producing 60 bushels, reduced to 54, will yield, as 
before, no rent. So that the rent of the first quality of land 
has lost four bushels ; of the second, three ; of the third, 
two ; and of the fourth, one : that is, each has lost exactly 
one-tenth. A tax, therefore, of a fixed proportion of the 
produce, lowers, in the same proportion, corn-rent. 

But it is only corn-rent that is lowered, and not rent esti- 
mated in money, or in any other commodity. For, in the 
same proportion as corn-rent is reduced in quantity, the corn 
composing it is raised in value. Under the tithe, 54 bush- 
els will be worth in the market what 60 were before ; and 
nine-tenths will in all cases sell for as much as the whole 
ten-tenths previously sold for. The landlords will therefore 
be compensated in value and price for what they lose in 
quantity ; and will suffer only so far as they consume their 
rent in kind, or, after receiving it in money, expend it in 
agricultural produce : that is, they only suffer as consumers 
of agricultural produce, and in common with all the other 
consumers. Considered as landlords, they have the same 
income as before ; the tithe, therefore, falls on the consumer, 
and not on the landlord. 

The same effect would be produced on rent, if the tax, 



TAXES ON COMMODITIES. 441 

instead of being a fixed proportion of the produce, were a 
fixed sum per quarter or per bushel. A tax which takes a 
shilling for every bushel, takes more shillings from one field 
than from another, just in proportion as it produces more 
bushels ; and operates exactly like tithe, except that tithe is 
not only the same proportion on all lands, but is also the same 
proportion at all times, while a fixed sum of money per 
bushel will amount to a greater or less proportion, according 
as corn is cheap or dear. 

There are other modes of taxing agriculture, which would 
affect rent differently. A tax proportioned to the rent 
would fall wholly on the rent, and would not at all raise the 
price of corn, which is regulated by the portion of the prod- 
uce that pays no rent. A fixed tax of so much per culti- 
vated acre, without distinction of value, would have effects 
directly the reverse. Taking no more from the best quali- 
ties of land than from the worst, it would leave the differ- 
ences the same as before, and consequently the same corn- 
rents, and the landlords would profit to the full extent of 
the rise of price. To put the thing in another manner ; 
the price must rise sufficiently to enable the worst land to 
pay the tax : thus enabling all lands which produce more 
than the worst, to pay not only the tax, but also an in- 
creased rent to the landlords. These, however, are not so 
much taxes on the produce of land, as taxes on the land 
itself. Taxes on the produce, properly so called, whether 
fixed or ad valorem, do not affect rent, but fall on the con- 
sumer : profits, however, generally bearing either the whole 
or the greatest part of the portion which is levied on the 
consumption of the labouring classes. 

§ 4. The preceding is, I apprehend, a correct statement 
of the manner in which taxes on agricultural produce oper- 
ate when first laid on. When, however, they are of old 
standing, their effect may be different, as was first pointed 
out, 1 believe, by Mr. Senior. It is, as we have seen, an 
almost infallible consequence of any reduction of profits to 



442 BOOK V. CHAPTER IV. §4. 

retard the rate of accumulation. Now the effect of accu- 
mulation, when attended by its usual accompaniment, an in- 
crease of population, is to increase the value and price of 
food, to raise rent, and to lower profits : that is, to do pre- 
cisely what is done by a tax on agricultural produce, except 
that this does not raise rent. The tax, therefore, merely 
anticipates the rise of price, and fall of profits, which would 
have taken place ultimately through the mere progress of 
accumulation ; while it at the same time prevents, or at least 
retards, that progress. If the rate of profit was such, pre- 
vious to the imposition of a tithe, that the effect of the tithe 
reduces it to the practical minimum, the tithe will put a 
stop to all further accumulation, or cause it to take place 
out of the country ; and the only effect which the tithe will 
then have had on the consumer, is to make him pay earlier 
the price which he would have had to pay somewhat later — 
part of which, indeed, in the gradual progress of wealth and 
population, he would have almost immediately begun to 
pay. After a lapse of time which would have admitted of 
a rise of one-tenth from the natural progress of wealth, the 
consumer will be paying no more than he would have paid 
if the tithe had never existed ; he will have ceased to pay 
any portion of it, and the person who will really pay it is 
the landlord, whom it deprives of the increase of rent which 
would by that time have accrued to him. At every suc- 
cessive point in this interval of time, less of the burden 
will rest on the consumer, and more of it on the landlord : 
and in the ultimate result, the minimum of profits will be 
reached with a smaller capital and population, and a lower 
rental, than if the course of things had not been disturbed 
by the imposition of the tax. If, on the other hand, the tithe 
or other tax on agricultural produce does not reduce profits 
to the minimum, but to something above the minimum, 
accumulation will not be stopped, but only slackened : and 
if population also increases, the two-fold increase will con- 
tinue to produce its effects — a rise of the price of corn, and 
an increase of rent. These consequences, however, will 



TAXES ON COMMODITIES. 443 

not take place with the same rapidity as if the higher rate 
of profit had continued. At the end of twenty years the 
country will have a smaller population and capital, than, 
but for the tax, it would by that time have had ; the land- 
lords will have a smaller rent ; and the price of corn having 
increased less rapidly than it would otherwise have done, 
will not be so much as a tenth higher that what, if there had 
been no tax, it would by that time have become. A part 
of the tax, therefore, will already have ceased to fall on the 
consumer, and devolved upon the landlord ; and the pro- 
portion will become greater and greater by lapse of time. 

Mr. Senior illustrates this view of the subject by likening 
the effects of tithes, or other taxes on agricultural produce, 
to those of natural sterility of soil. If the land of a country 
without access to foreign supplies, were suddenly smitten 
with a permanent deterioration of quality, to an extent 
which would make a tenth more labour necessary to raise 
the existing produce, the price of corn would undoubtedly 
rise one-tenth. But it cannot hence be inferred that if the 
soil of the country had from the beginning been one-tenth 
worse than it is, corn would at present have been one-tenth 
dearer than we find it. It is far more probable, that the 
smaller return to labour and capital, ever since the first 
settlement of the country, would have caused in each suc- 
cessive generation a less rapid increase than has taken place : 
that the country would now have contained less capital, and 
maintained a smaller population, so that notwithstanding the 
inferiority of the soil, the price of corn would not have been 
higher, nor profits lower, than at present ; rent alone would 
certainly have been lower. We may suppose two islands, 
which, being alike in extent, in natural fertility, and indus- 
trial advancement, have up to a certain time been equal in 
population and capital, and have had equal rentals, and the 
same price of corn. Let us imagine a tithe imposed in one 
of these islands, but not in the other. There will be imme- 
diately a difference in the price of corn, and therefore prob- 
ably in profits. While profits are not tending downwards 



444 BOOK V. CHAPTEK IV. §4. 

in either country, that is, while improvements in the pro- 
duction of necessaries fully keep pace with the increase of 
population, this difference of prices and profits between the 
islands may continue. But if, in the untithed island, cap- 
ital increases, and population along with it, more than enough 
to counterbalance any improvements which take place, the 
price of corn will gradually rise, profits will fall, and rent will 
increase ; while in the tithed island capital and population 
will either not increase (beyond what is balanced by the 
improvements), or if they do, will increase in a less degree ; 
bo that rent and the price of corn will either not rise at all, 
or rise more slowly. Eent, therefore, will soon be higher in 
the untithed, than in the tithed island, and profits not so 
much higher nor corn so much cheaper, as they were on the 
first imposition of the tithe. These effects will be progressive. 
At the end of every ten years there will be a greater differ- 
ence between the rentals and between the aggregate wealth 
and population of the two islands, and a less difference in 
profits and in the price of corn. 

At what point will these last differences entirely cease, 
and the temporary effect of taxes on agricultural produce, in 
raising the price, have entirely given place to the ultimate 
effect, that of limiting the total produce of the country ? 
Though the untithed island is always verging towards the 
point at which the price of food would overtake that in the 
tithed island, its progress towards that point naturally 
slackens as it draws nearer to attaining it ; since — the differ- 
ence between the two islands in the rapidity of accumula- 
tion, depending upon the difference in the rates of profit — in 
proportion as these approximate, the movement which draws 
them closer together, abates of its force. The one may not 
actually overtake the other, until both islands reach the 
minimum of profits : up to that point, the tithed island may 
continue more or less ahead of the untithed island in the 
price of corn : considerably ahead if it is far from the mini- 
mum, and is therefore accumulating rapidly ; very little 
ahead if it is near the minimum, and accumulating 
slowly. 



TAXES ON COMMODITIES. 445 

But whatever is true of the tithed and untithed islands, 
in our hypothetical case, is true of any country having a 
tithe, compared with the same country if it had never 
had a tithe. 

In England the great emigration of capital, and the 
almost periodical occurrence of commercial crises through 
the speculations occasioned by the habitually low rate of 
profit, are indications that profit has attained the practical, 
though not the ultimate minimum, and that all the savings 
which take place (beyond what improvements, tending to 
the cheapening of necessaries, make room for) are either sent 
abroad for investment, or periodically swept away. There 
can therefore, I think, be little doubt that if England had 
never had a tithe, or any tax on agricultural produce, the 
price of corn would have been by this time as high, and the 
rate of profits as low, as at present. Independently of the 
more rapid accumulation which would have taken place if 
profits had not been prematurely lowered by these imposts ; 
the mere saving of a part of the capital which has been 
wasted in unsuccessful speculations, and the keeping at home 
a part of that which has been sent abroad, would have 
been quite sufficient to produce the effect. I think, there- 
fore, with Mr. Senior, that the tithe, even before its com- 
mutation, had ceased to be a cause of high prices or low 
profits, and had become a mere deduction from rent ; its 
other effects being, that it caused the country to have no 
greater capital, no larger production, and no more numerous 
population than if had been one-tenth less fertile than it is ; 
or let us rather say one-twentieth, (considering how great a 
portion of the land of Great Britain was tithe-free.) 

But though tithes and other taxes on agricultural prod- 
uce, when of long standing, either do not raise the price of 
food and lower profits at all, or if at all, not in proportion to 
the tax ; yet the abrogation of such taxes, when they exist, 
does not the less diminish price, and, in general, raise the 
rate of profit. The abolition of a tithe takes one-tenth from 
the cost of production, and consequently from the price, of 



446 B00K V- CHAPTER IV. §4. 

all agricultural produce ; and unless it permanently raises 
the labourer's requirements, it lowers the cost of labour, and 
raises profits. Rent, estimated in money or in commodities, 
generally remains as before ; estimated in agricultural prod- 
uce, it is raised. The country adds as much by the repeal 
of a tithe, to the margin which intervenes between it and the 
stationary state, as was cut off from that margin by the tithe 
when first imposed. Accumulation is greatly accelerated ; 
and if population also increases, the price of corn imme- 
diately begins to recover itself, and rent to rise ; thus grad- 
ually transferring the benefit of the remission, from the 
consumer to the landlord. 

The effects which thus result from abolishing tithe, result 
equally from what has been done by the arrangements under 
the Commutation Act for converting it into a rent charge. 
When the tax, instead of being levied on the whole produce 
of the soil, is levied only from the portions which pay rent, 
and does not touch any fresh extension of cultivation, the 
tax no longer forms any part of the cost of production of 
the portion of the produce which regulates the price of all 
the rest. The land or capital which pays no rent, can now 
send its produce to market one-tenth cheaper. The com- 
mutation of tithe ought therefore to have produced a con- 
siderable fall in the average price of corn. If it had not 
come so gradually into operation, and if the price of corn had 
not during the same period been under the influence of sev- 
eral other causes of change, the effect would probably have 
been markedly conspicuous. As it is, there caD be no doubt 
that this circumstance has had its share in the fall which has. 
taken place in the cost of production and in /the price of 
home-grown produce ; though the effects of the great agricul- 
tural improvements which have been simultaneously advan- 
cing, and of the free admission of agricultural produce from 
foreign countries, have masked those of the other cause. 
This fall of price would not in itself have any tendency 
injurious to the landlord, since corn-rents are increased in the 
same ratio in which the price of corn is diminished. But 



TAXES ON COMMODITIES. 447 

neither does it in any way tend to increase his income. The 
rent-charge, therefore, which is substituted for tithe, is a 
dead loss to him at the expiration of existing leases : and the 
commutation of tithe was not a mere alteration in the mode 
in which the landlord bore an existing burden, but the im- 
position of a new one ; relief being afforded to the consumer 
at the expense of the landlord, who, however, begins imme- 
diately to receive progressive indemnification at the con- 
sumer's expense, by the impulse given to accumulation and 
population. 

§ 5. We have hitherto inquired into the effects of taxes 
on commodities, on the assumption that they are levied im- 
partially on every mode in which the commodity can be 
produced or brought to market. Another class of considera- 
tions is opened, if we suppose that this impartiality is not 
maintained, and that the tax is imposed, not on the com- 
modity, but on some particular mode of obtaining it. 

Suppose that a commodity is capable of being made by 
two different processes ; as a manufactured commodity may 
be produced either by hand or by steam-power ; sugar may 
be made either from the sugar-cane or from beet-root, cattle 
fattened either on hay and green crops, or on oil-cake and 
the refuse of breweries. It is the interest of the community v 
that of the two methods, producers should adopt that which 
produces the best article at the lowest price. This being 
also the interest of the producers, unless protected against 
competition, and shielded from the penalties of indolence ; 
the process most advantageous to the community is that 
which, if not interfered with by government, they ulti- 
mately find it to their advantage to adopt. Suppose how- 
ever that a tax is laid on one of the processes, and no tax at 
all, or one of smaller amount, on the other. If the taxed 
process is the one which the producers would not have 
adopted, the measure is simply nugatory. But if the tax 
falls, as it is of course intended to do, upon the one which 
they would have adopted, it creates an artificial motive for 



448 BOOK V. CHAPTER IV. §5. 

preferring the untaxed process, though the inferior of the 
two. If, therefore, it has any effect at all, it causes the 
commodity to be produced of worse quality, or at a greater 
expense of labour ; it causes so much of the labour of the 
community to be wasted, and the capital employed in sup- 
porting and remunerating that labour to be expended as 
uselessly, as if it were spent in hiring men to dig holes and 
fill them up again. This waste of labour and capital consti- 
tutes an addition to the cost of production of the commod- 
ity, which raises its value and price in a corresponding ratio, 
and thus the owners of the capital are indemnified. The 
loss falls on the consumers ; though the capital of the coun- 
try is also eventually diminished, by the diminution of their 
means of saving, and in some degree, of their inducements 
to save. 

The kind of tax, therefore, which comes under the general 
denomination of a discriminating duty, transgresses the rule 
that taxes should take as little as possible from the tax-payer 
beyond what they bring into the treasury of the state. A 
discriminating duty makes the consumer pay two distinct 
taxes, only one of which is paid to the government, and 
that frequently the less onerous of the two. If a tax were 
laid on sugar produced from the cane, leaving the sugar 
from beet-root untaxed, then in so far as cane sugar contin- 
ued to be used, the tax on it would be paid to the treasury, 
and might be as unobjectionable as most other taxes ; but 
if cane sugar, having previously been cheaper than beet-root 
sugar, was now dearer, and beet-root sugar was to any con- 
siderable amount substituted for it, and fields laid out and 
manufactories established in consequence, the government 
would gain no revenue from the beet-root sugar, while the 
consumers of it would pay a real tax. They would pay for 
beet-root sugar more than they had previously paid for cane 
sugar, and the difference would go to indemnify producers 
for a portion of the labour of the country actually thrown 
away, in producing by the labour of (say) three hundred 
men, what could be obtained by the other process with the 
labour of two hundred. 



TAXES ON COMMODITIES. 449 

One of the commonest cases of discriminating duties, is 
that of a tax on the importation of a commodity capable of 
being produced at home, unaccompanied by an equivalent 
tax on the home production. A commodity is never perma- 
nently imported, unless it can be obtained from abroad at a 
smaller cost of labour and capital on the whole, than is 
necessary for producing it. If, therefore, by a duty on the 
importation, it is rendered cheaper to produce the article 
than to import it, an extra quantity of labour and capital is 
expended, without any extra result. The labour is useless, 
and the capital is spent in paying people for laboriously 
doing nothing. All custom duties which operate as an 
encouragement to the home production of the taxed article, 
are thus an eminently wasteful mode of raising a revenue. 

This character belongs in a peculiar degree to custom 
duties on the produce of land, unless countervailed by excise 
duties on the home production. Such taxes bring less into 
the public treasury, compared with what they take from the 
consumers, than any other imposts to which civilized na- 
tions are usually subject. If the wheat produced in a coun- 
try is twenty millions of quarters, and the consumption 
twenty-one millions, a million being annually imported, 
and if on this million a duty is laid which raises the price 
ten shillings per quarter, the price which is raised is not 
that of the million only, but of the whole twenty-one mil- 
lions. Taking the most favourable, but extremely improba- 
ble supposition, that the importation is not at all checked, 
nor the home production enlarged, the state gains a revenue 
of only half a million, while the consumers are taxed ten 
millions and a half : the ten millions being a contribution 
to the home growers, who are forced by competition to 
resign it all to the landlords. The consumer thus pays to 
the owners of land an additional tax, equal to twenty times 
that which he pays to the state. Let us now suppose that 
the tax really checks importation. Suppose importation 
stopped altogether in ordinary years ; it being found that 
the million of quarters can be obtained, by a more elaborate 



450 BOOK V. CHAPTER IV. §5. 

cultivation, or by breaking up inferior land, at a less ad- 
vance than ten shillings upon the previous price — say, for 
instance, five shillings a quarter. The revenue now obtains 
nothing, except from the extraordinary imports which may 
happen to take place in a season of scarcity. But the con- 
sumers pay every year a tax of five shillings on the whole 
twenty-one millions of quarters, amounting to 5J millions 
sterling. Of this the odd 250,000^. goes to compensate the 
growers of the last million of quarters for the labour and 
capital wasted under the compulsion of the law. The 
remaining five millions go to enrich the landlords as be- 
fore. 

Such is the operation of what are technically termed 
Corn Laws, when first laid on ; and such continues to be 
their operation, so long as they have any effect at all in 
raising the price of corn. But I am by no means of opin- 
ion that in the long run they keep up either prices or rents 
in the degree which these considerations might lead us to 
suppose. What we have said respecting the effect of tithes 
and other taxes on agricultural produce, applies in a great 
degree to corn laws : they anticipate artificially a rise of 
price and of rent, which would at all events have taken 
place through the increase of population and of production. 
The difference between a country without corn laws, and a 
country which has long had corn laws, is not so much that 
the last has a higher price or a larger rental, but that it has 
the same price and the same rental with a smaller aggregate 
capital and a smaller population. The imposition of corn 
laws raises rents, but retards that progress of accumulation 
which would in no long period have raised them fully as 
much. The repeal of corn laws tends to lower rents, but it 
unchains a force which, in a progressive state of capital and 
population, restores and even increases the former amount. 
There is every reason to expect that under the virtually 
free importation of agricultural produce, at last extorted 
from the ruling powers of this country, the price of food, 
if population goes on increasing, will gradually but steadily 



TAXES ON COMMODITIES. 451 

rise ; though this effect may for a time be postponed by the 
strong current which in this country has set in (and the im- 
pulse is extending itself to other countries) towards the 
improvement of agricultural science, and its increased 
application to practice. 

What we have said of duties on importation generally, 
is equally applicable to discriminating duties which favour 
importation from one place or in one particular manner, in 
contradistinction to others ; such as the preference given to 
the produce of a colony, or of a country with which there 
is a commercial treaty ; or the higher duties formerly im- 
posed by our navigation laws on goods imported in other 
than British shipping. Whatever else may be alleged in 
favour of such distinctions, whenever they are not nugatory, 
they are economically wasteful. They induce a resort to a 
more costly mode of obtaining a commodity, in lieu of one 
less costly, and thus cause a portion of the labour which the 
country employs in providing itself with foreign commodi- 
ties, to be sacrificed without return. 

§ 6. There is one more point, relating to the operation 
of taxes on commodities conveyed from one country to 
another, which requires notice ; the influence which they 
exert on international exchanges. Every tax on a commod- 
ity tends to raise its price, and consequently to lessen the 
demand for it in the market in which it is sold. All taxes 
on international trade tend, therefore, to produce a disturb- 
ance and a re-adjustment of what we have termed the 
Equation of International Demand. This consideration 
leads to some rather curious consequences, which have been 
pointed out in the separate essay on International Com- 
merce already several times referred to in this treatise. 

Taxes on foreign trade are of two kinds — taxes on im- 
ports, and on exports. On the first aspect of the matter it 
would seem that both these taxes are paid by the consumers 
of the commodity ; that taxes on exports consequently fall 
entirely on foreigners, taxes on imports wholly on the home 



452 BOOK V. CHAPTER IV. §6. 

consumer. The true state of the case, however, is much 
more complicated. 

" By taxing exports, we may, in certain circumstances, 
produce a division of the advantage of the trade more 
favourable to ourselves. In some cases we may draw into 
our coffers, at the expense of foreigners, not only the 
whole tax, but more than the tax ; in other cases, we should 
gain exactly the tax ; in others, less than the tax. In this 
last case, a part of the tax is borne by ourselves ; possibly 
the whole, possibly even, as we shall show, more than the 
whole." 

Reverting to the supposititious case employed in the Es- 
say, of a trade between Germany and England in broad- 
cloth and linen, " suppose that England taxes her export 
of cloth, the tax not being supposed high enough to induce 
Germany to produce cloth for herself. The price at which 
cloth can be sold in Germany is augmented by the tax. 
This will probably diminish the quantity consumed. It 
may diminish it so much that, even at the increased price, 
there will not be required so great a money value as before. 
Or it may not diminish it at all, or so little, that in conse- 
quence of the higher price, a greater money value will be 
purchased than before. In this last case, England will gain,, 
at the expense of Germany, not only the whole amount of 
the duty, but more ; for, the money value of her exports to> 
Germany being increased, while her imports remain the 
same, money will flow into England from Germany. The 
price of cloth will rise in England, and consequently in 
Germany ; but the price of linen will fall in Germany, 
and consequently in England. We shall export less cloth, 
and import more linen, till the equilibrium is restored. 
It thus appears (what is at first sight somewhat remarkable) 
that by taxing her exports, England would, in some con- 
ceivable circumstances, not only gain from her foreign cus- 
tomers the whole amount of the tax, but would also get her 
imports cheaper. She would get them cheaper in two 
ways ; for she would obtain them for less money, and would 



TAXES ON COMMODITIES. 453 

have more mOiiey to purchase them with. Germany, on 
the other hand, would suffer doubly : she would have to 
pay for her cloth a price increased not only by the duty, 
but by the influx of money into England, while the same 
change in the distribution of the circulating medium would 
leave her less money to purchase it with. 

" This however, is only one of three possible cases. If, 
after the imposition of the duty, Germany requires so dimi- 
nished a quantity of cloth, that its total value is exactly the 
same as before, the balance of trade would be undisturbed ; 
England will gain the duty, Germany will lose it, and noth- 
ing more. If, again, the imposition of the duty occasions 
such a falling off in the demand that Germany requires a 
less pecuniary value than before, our exports will no longer 
pay for our imports ; money must pass from England into 
Germany ; and Germany's share of the advantage of the 
trade will be increased. By the change in the distribution 
of money, cloth will fall in England ; and therefore it will, 
of course, fall in Germany. Thus Germany will not pay 
the whole of the tax. From the same cause, linen will rise 
in Germany, and consequently in England. When this 
alteration of prices has so adjusted the demand, that the 
cloth and the linen again pay for one another, the result is 
that Germany has paid only a part of the tax, and the re- 
mainder of what has been received into our treasury has 
come indirectly out of the pockets of our own consumers of 
linen, who pay a higher price for that imported commodity 
in consequence of the tax on our exports, while at the same 
time they, in consequence of the efflux of money and the 
fall of prices, have smaller money incomes wherewith to 
pay for the linen at that advanced price. 

" It is not an impossible supposition that by taxing our 
exports we might not only gain nothing from the foreigner, 
the tax being paid out of our own pockets, but might even 
compel our own people to pay a second tax to the foreigner. 
Suppose, as before, that the demand of Germany for cloth 
falls off so much on the imposition of the duty, that she 



454: BOOK V. CHAPTER IV. §6. 

requires a smaller money value than before, but that the 
case is so different with linen in England, that when the 
price rises the demand either does not fall off at all, or so 
little that the money value required is greater than before. 
The first effect of laying on the duty is, as before, that the 
cloth exported will no longer pay for the linen imported. 
Money will therefore flow out of England into Germany. 
One effect is to raise the price of linen in Germany, and 
consequently in England. But this, by the supposition, in- 
stead of stopping the efflux of money, only makes it greater, 
because the higher the price, the greater the money value 
of the linen consumed. The balance, therefore, can only be 
restored by the other effect, which is going on at the same 
time, namely, the fall of cloth in the English and conse- 
quently in the German market. Even when cloth has 
fallen so low that its price with the duty is only equal to 
what its price without the duty was at first, it is not a 
necessary consequence that the fall will stop ; for the same 
amount of exportation as before will not now suffice to pay 
the increased money value of the imports ; and although 
the German consumers have now not only cloth at the old 
price, but likewise increased money incomes, it is not certain 
that they will be inclined to employ the increase of their 
incomes in increasing their purchases of cloth. The price of 
cloth, therefore, must perhaps fall, to restore the equilibrium, 
more than the whole amount of the duty ; Germany may 
be enabled to import cloth at a lower price when it is taxed, 
than when it was untaxed : and this gain she will acquire 
at the expense of the English consumers of linen, who, in 
addition, will be the real payers of the whole of what is 
received at their own custom-house under the name of 
duties on the export of cloth." 

It is almost unnecessary to remark that cloth and linen 
are here merely representatives of exports and imports 
in general ; and that the effect which a tax on exports 
might have in increasing the cost of imports, would affect 
the imports from all countries, and not peculiarly the 



TAXES ON COMMODITIES. 455 

articles which might be imported from the particular coun- 
try to which the taxed exports were sent. 

" Such are the extremely various effects which may 
result to ourselves and to our customers from the imposition 
of taxes on our exports ; and the determining circumstan- 
ces are of a nature so imperfectly ascertainable, that it must 
be almost impossible to decide with any certainty, even 
after the tax has been imposed, whether we have been 
gainers by it or losers." In general however there could be 
little doubt that a country which imposed such taxes M T ould 
succeed in making foreign countries contribute something 
to its revenue ; but unless the taxed article be one for 
which their demand is extremely urgent, they will seldom 
pay the whole of the amount which the tax brings in.* 
" In any case, whatever we gain is lost by somebody else, 
and there is the expense of the collection besides : if inter- 
national morality, therefore, were rightly understood and 
acted upon, such taxes, as being contrary to the universal 
weal, would not exist." 

Thus far of duties on exports. We now proceed to the 
more ordinary case of duties on imports. " We have had 
an example of a tax on exports, that is on foreigners, fall- 
ing in part on ourselves. We shall therefore not be sur- 
prised if we find a tax on imports, that is, on ourselves, 
partly falling upon foreigners. 

" Instead of taxing the cloth which we export, suppose 
that we tax the linen which we import. The duty which 
we are now supposing must not be what is termed a pro- 
tecting duty, that is, a duty sufficiently high to induce us 
to produce the article at home. If it had this effect, it 
would destroy entirely the trade both in cloth and in linen, 
and both countries would lose the whole of the advantage 

* Probably the strongest known instance of a large revenue raised from for- 
eigners by a tax on exports, is the opium trade with China. The high price of 
the article under the Government monopoly (which is equivalent to a high ex- 
port duty) has so little effect in discouraging its consumption, that it is said to 
have been occasionally sold in China for as much as its weight in silver. 



456 B 00K V. CHAPTER IV. §6. 

which they previously gained by exchanging those com- 
modities with one another. We suppose a duty which 
might diminish the consumption of the article, but which 
would not prevent us from continuing to import, as before, 
whatever linen we did consume. 

" The equilibrium of trade would be disturbed if the im- 
position of the tax diminished, in the slightest degree, the 
quantity of linen consumed. For, as the tax is levied at 
our own custom-house, the German exporter only receives 
the same price as formerly, though the English consumer 
pays a higher one. If, therefore, there be any diminution 
of the quantity bought, although a larger sum of money 
may be actually laid out in the article, a smaller one will be 
due from England to Germany : this sum will no longer be 
an equivalent for the sum due from Germany to England 
for cloth, the balance therefore must be paid in money. 
Prices will fall in Germany and rise in England ; linen will 
fall in the German market ; cloth will rise in the English. 
The Germans will pay a higher price for cloth, and will 
have smaller money incomes to buy it with ; while the 
English will obtain linen cheaper, that is, its price will ex- 
ceed what it previously was by less than the amount of the 
duty, while their means of purchasing it will be increased 
by the increase of their money incomes. 

" If the imposition of the tax does not diminish the de- 
mand, it will leave the trade exactly as it was before. We 
shall import as much, and export as much ; the whole of 
the tax will be paid out of our own pockets. 

" Bat the imposition of a tax on a commodity almost 
always diminishes the demand more or less ; and it can 
never, or scarcely ever, increase the demand. It may, 
therefore, be laid down as a principle, that a tax on import- 
ed commodities, when it really operates as a tax, and not 
as a prohibition either total or partial, almost always falls, 
in part upon the foreigners who consume our goods ; and 
that this is a mode in which a nation may appropriate to 
itself, at the expense of foreigners, a larger share than 



TAXES ON COMMODITIES. 457 

would otherwise belong to it of the increase in the general 
productiveness of the labour and capital of the world, 
which results from the interchange of commodities among 
nations." 

Those are, therefore, in the right who maintain that 
taxes on imports are partly paid by foreigners ; but they 
are mistaken when they say, that it is by the foreign pro- 
ducer. It is not on the person from whom we buy, but on 
all those who buy from us, that a portion of our custom 
duties spontaneously falls. It is the foreign consumer of 
our exported commodities, who is obliged to pay a higher 
price for them because we maintain revenue duties on 
foreign goods. 

There are but two cases in which duties on commodities 
can in any degree, or in any manner, fall on the producer. 
One is, when the article is a strict monopoly, and at a scar- 
city price. The price in this case being only limited by the 
desires of the buyer ; the sum obtained for the restricted 
supply being the utmost which the buyers would consent to 
give rather than go without it ; if the treasury intercepts a 
part of this, the price cannot be further raised to compensate 
for the tax, and it must be paid from the monopoly profits. 
A tax on rare and high priced wines will fall wholly on the 
growers, or rather, on the owners of the vineyards. The 
second case in which the producer sometimes bears a por- 
tion of the tax, is more important : the case of duties on the 
produce of land or of mines. These might be so high as to 
diminish materially the demand for the produce, and com- 
pel the abandonment of some of the inferior qualities of land 
or mines. Supposing this to be the effect, the consumers, 
both in the country itself and in those which dealt with it, 
would obtain the produce at smaller cost ; and a part only, 
instead of the whole, of the duty would fall on the purchas- 
er, who would be indemnified chiefly at the expense of the 
landowners or mine-owners in the producing country. 

Duties on importation may, then, be divided " into two 
classes : those which have the effect of encouraging some 



458 BOOK V. CHAPTER IV. §6. 

particular branch of domestic industry, and those which 
have not. The former are purely mischievous, both to the 
country imposing them, and to those with whom it trades. 
They prevent a saving of labour and capital, which, if per- 
mitted to be made, would be divided in some proportion or 
other between the importing country and the countries 
which buy what that country does or might export. 

" The other class of duties are those which do not 
encourage one mode of procuring an article at the expense 
of another, but allow interchange to take place just as if the 
duty did not exist, and to produce the saving of labour 
which constitutes the motive to international, as to all other 
commerce. Of this kind are duties on the importation of 
any commodity which could not by any possibility be pro- 
duced at home ; and duties not sufficiently high to counter- 
balance the difference of expense between the production of 
the article at home and its importation. Of the money 
which is brought into the treasury of any country by taxes 
of this last description, a part only is paid by the people 
of that country ; the remainder by the foreign consumers 
of their goods. 

" Nevertheless, this latter kind of taxes are in principle 
as ineligible as the former, though not precisely on the same 
ground. A protecting duty can never be a cause of gain, 
but always and necessarily of loss, to the country imposing 
it, just so far as it is efficacious to its end. A non-protecting 
duty, on the contrary, would in most cases be a source of 
gain to the country imposing it, in so far as throwing part 
of the weight of its taxes upon other people is a gain ; but 
it would be a means which it could seldom be advisable to 
adopt, being so easily counteracted by a precisely similar 
proceeding on the other side. 

" If England, in the case already supposed, sought to 
obtain for herself more than her natural share of the advan- 
tage of the trade with Germany, by imposing a duty upon 
linen, Germany would only have to impose a duty upon 
cloth, sufficient to diminish the demand for that article 



TAXES ON COMMODITIES. 459 

about as much as the demand for linen had been diminished 
in England by the tax. Things would then be as before, 
and each country would pay its own tax. Unless, indeed, 
the sum of the two duties exceeded the entire advantage of 
the trade ; for in that case the trade, and its advantage, 
would cease entirely. 

" There would be no advantage, therefore, in imposing 
duties of this kind, with a view to gain by them in the man- 
ner which has been pointed out. But when any part of the 
revenue is derived from taxes on commodities, these may 
often be as little objectionable as the rest. It is evident, 
too, that considerations of reciprocity, which are quite 
unessential when the matter in debate is a protecting duty, 
are of material importance when the repeal of duties of this 
other description is discussed. A country cannot be expect- 
ed to renounce the power of taxing foreigners, unless for- 
eigners will in return practise towards itself the same for- 
bearance. The only mode in which a country can save 
itself from being a loser by the revenue duties imposed by 
other countries on its commodities, is to impose correspond 
ing revenue duties on theirs. Only it must take care that 
those duties be not so high as to exceed all that remains 
of the advantage of the trade, and put an end to impor- 
tation altogether, causing the article to be either pro- 
duced at home, or imported from another and a dearej* 
market.' 1 



CHAPTEK V. 

OF SOME OTHER TAXES. 

§ 1. Besides direct taxes on income, and taxes on con- 
sumption, the financial systems of most countries comprise 
a variety of miscellaneous imposts, not strictly included in 
either class. The modern European systems retain many 
such taxes, though in much less number and variety than 
those semi-barbarous governments which European influence 
has not yet reached. In some of these, scarcely any inci- 
dent of life has escaped being made an excuse for some 
fiscal exaction ; hardly any act, not belonging to daily rou- 
tine, can be performed by any one, without obtaining leave 
from some agent of government, which is only granted in 
consideration of a payment : especially when the act re- 
quires the aid or the peculiar guarantee of a public author- 
ity. In the present treatise we may confine our attention 
to such taxes as lately existed, or still exist, in countries 
usually classed as civilized. 

In almost all nations a considerable revenue is drawn 
from taxes on contracts. These are imposed in various 
forms. One expedient is that of taxing the legal instrument 
which serves as evidence of the contract, and which is com- 
monly the only evidence legally admissible. In England, 
scarcely any contract is binding unless executed on stamped 
paper, which has paid a tax to government ; and until very 
lately, when the contract related to property the tax was 
proportionally rmich heavier on the smaller than on the 
larger transactions ; which is still true of some of those 



MISCELLANEOUS TAXES. 461 

taxes. There are also stamp duties on the legal instruments 
which are evidence of the fulfilment of contracts ; such as 
acknowledgments of receipt and deeds of release. Taxes 
on contracts are not always levied by means of stamps. 
The duty on sales by auction, abrogated by Sir Robert 
Peel, was an instance in point. The taxes on transfers of 
landed property, in France, are another : in England these 
are stamp-duties. In some countries contracts of many 
kinds are not valid unless registered, and their registration 
is made an occasion for a tax. 

Of taxes on contracts, the most important are those on the 
transfer of property ; chiefly on purchases and sales. Taxes 
on the sale of consumable commodities are simply taxes on 
those commodities. If they affect only some particular com- 
modities, they raise the prices of those commodities, and are 
paid by the consumer. If the attempt were made to tax all 
purchases and sales, which, however absurd, was for centuries 
the law of Spain, the tax, if it could be enforced, would be 
equivalent to a tax on all commodities, and would not affect 
prices : if levied from the sellers, it would be a tax on profits, 
if from the buyers, a tax on consumption ; and neither class 
could throw the burthen upon the other. If confined to 
some one mode of sale, as for example by auction, it dis- 
courages recourse to that mode, and if of any material 
amount, prevents it from being adopted at all, unless in a 
case of emergency ; in which case as the seller is under a 
necessity to sell, but the buyer under no necessity to buy, 
the tax falls on the seller ; and this was the strongest of the 
objections to the auction duty : it almost always fell on a 
necessitous person, and in the crisis of his necessities. 

Taxes on the purchase and sale of land are, in most 
countries, liable to the same objection. Landed property 
in old countries is seldom parted with, except from reduced 
circumstances, or some urgent need : the seller therefore, 
must take what he can get, while the buyer, whose object 
is an investment, makes his calculations on the interest 
which he can obtain for his money in other ways, and will 



462 B 00K V. CHAPTER V. §1. 

not buy if he is charged with a government tax on the transac- 
tion. It has indeed been objected, that this argument would 
not apply if all modes of permanent investment, such as the 
purchase of government securities, shares in joint-stock 
companies, mortgages and the like, were subject to the 
same tax. But even then, if paid by the buyer, it would 
be equivalent to a tax on interest : if sufficiently heavy to 
be of any importance, it would disturb the established relation 
between interest and profit ; and the disturbance would 
redress itself by a rise in the rate of interest, and a fall of 
the price of land and of all securities. It appears to me, 
therefore, that the seller is the person by whom such taxes, 
unless under peculiar circumstances, will always be borne. 

All taxes must be condemned which throw obstacles in 
the way of the sale of land, or other instruments of produc- 
tion. Such sales tend naturally to render the property 
more productive. The seller, whether moved by necessity 
or choice, is probably some one who is either without the 
means, or without the capacity, to make the most advanta- 
geous use of the property for productive purposes ; while 
the buyer, on the other hand, is at any rate not needy, and 
is frequently both inclined and able to improve the property, 
since, as it is worth more to such a person than to any other, 
he is likely to offer the highest price for it. All taxes, 
therefore, and all difficulties and expenses, annexed to 
such contracts, are decidedly detrimental ; especially in the 
case of land, the source of subsistence, and the original 
foundation of all wealth, on the improvement of which, 
therefore, so much depends. Too great facilities cannot 
be given to enable land to pass into the hands, and assume 
the modes of aggregation or division, most conducive to its 
productiveness. If landed properties are too large, alienation 
should be free, in order that they may be subdivided ; if too 
small, in order that they may be united. All taxes on the 
transfer of landed property should be abolished ; but, as the 
landlords have no claim to be relieved from any reservation 
which the state has hitherto made in its own favour from the 



MISCELLANEOUS TAXES. 463 

amount of their rent, an annual impost equivalent to the 
average produce of these taxes should be distributed over the 
land generally, in the form of a land-tax. 

Some of the taxes on contracts are very pernicious, im- 
posing a virtual penalty upon transactions which it ought 
to be the policy of the legislator to encourage. Of this 
sort is the stamp duty on leases, which in a country of 
large properties are an essential condition of good agricul- 
ture ; and the tax on insurances a direct discouragement 
to prudence and forethought. In the case of fire insurances, 
the tax is exactly double the amount of the premium of 
insurance on common risks ; so that the person insuring is 
obliged by the government to pay for the insurance just 
three times the value of the risk. If this tax existed in 
France, we should not see, as we do in some of her prov- 
inces, the plate of an insurance company on almost every 
cottage or hovel. This, indeed, must be ascribed to the 
provident and calculating habits produced by the dissemi- 
nation of property through the labouring class : but a tax of 
so extravagant an amount would be a heavy drag upon any 
habits of providence. 

§ 2. Nearly allied to the taxes on contracts are those 
on communication. The principal of these is the postage 
tax ; to which may be added taxes on advertisements, and 
on newspapers, which are taxes on the communication of 
information. 

The common mode of levying a tax on the conveyance 
of letters, is by making the government the sole authorized 
carrier of them, and demanding a monopoly price. When 
this price is so moderate as it is in this country under the 
uniform penny postage, scarcely if at all exceeding what 
would be charged under the freest competition by any pri- 
vate company, it can hardly be considered as taxation, but 
rather as the profits of a business ; whatever excess there is 
above the ordinary profits of stock being a fair result of the 
saving of expense, caused by having onlj' one establishment 



464 B0 °K V. CHAPTER V. §2. 

and one set of arrangements for the whole country, instead 
of many competing ones. The business, too, being one 
which both can and ought to be conducted on fixed rules, is 
one of the few businesses which it is not unsuitable to a 
government to conduct. The post office, therefore, is at 
present one of the best of the sources from which this coun- 
try derives its revenue. But a postage much exceeding 
what would be paid for the same service in a system of 
freedom, is not a desirable tax. Its chief weight falls on 
letters of business, and increases the expense of mercantile 
relations between distant places. It is like an attempt to 
raise a large revenue by heavy tolls : it obstructs all opera- 
tions by which goods are conveyed from place to place, and 
discourages the production of commodities in one place for 
consumption in another ; which is not only in itself one of 
the greatest sources of economy of labour, but is a necessary 
condition of almost all improvements in production and one 
of the strongest stimulants to industry and promoters of 
civilization. 

A tax on advertisements is not free from the same objec- 
tion, since in whatever degree advertisements are useful to 
business, by facilitating the coming together of the dealer or 
producer and the consumer, in that same degree, if the tax 
be high enough to be a serious discouragement to advertis- 
ing, it prolongs the period during which goods remain 
unsold, and capital locked up in idleness. 

A tax on newspapers is objectionable, not so much 
where it does fall as where it does not, that is, where it 
prevents newspapers from being used. To the generality 
of those who buy them, newspapers are a luxury which 
they can as well afford to pay for as any other indulgence, 
and which is as unexceptionable a source of revenue. But 
to that large part of the community who have been taught 
to read, but have received little other intellectual education, 
newspapers are the source of nearly all the general informa- 
tion which they possess, and of nearly all their acquaintance 
with the ideas and topics current among mankind ; and an 



MISCELLANEOUS TAXES. 465 

interest is more easily excited in newspapers, than in books 
or other more recondite sources of instruction. News- 
papers contribute so little, in a direct way, to the origina- 
tion of useful ideas, that many persons undervalue the 
importance of their office in disseminating them. They 
correct many prejudices and superstitions, and keep up a 
habit of discussion, and interest in public concerns, the 
absence of which is a great cause of the stagnation of mind 
usually found in the lower and middle, if not in all, ranks, 
of those countries where newspapers of an important or 
interesting character do not exist. There ought to be no 
taxes which render this great diffuser of information, of 
mental excitement, and mental exercise, less accessible to 
that portion of the public which most needs to be carried 
into a region of ideas and interest beyond its own limited 
horizon. 

§ 3. In the enumeration of bad taxes, a conspicuous 
place must be assigned to law taxes ; which extract a 
revenue for the state from the various operations involved 
in an application to the tribunals. Like all needless expenses 
attached to law proceedings, they are a tax on redress, and 
therefore a premium on injury. Although such taxes have 
been abolished in this country as a general source of reve- 
nue, they still exist in the form of fees of court, for defray- 
ing the expense of the courts of justice ; under the idea, 
apparently, that those may fairly be required to bear the 
expenses of the administration of justice, who reap the 
benefit of it. The fallacy of this doctrine was powerfully 
exposed by Bentham. As he remarked, those who are 
under the necessity of going to law, are those who benefit 
least, not most, by the law and its administration. To 
them the protection whicli the law affords has not been 
complete, since they have been obliged to resort to a court 
of justice to ascertain their rights, or maintain those rights 
against infringement : while the remainder of the public 
have enjoyed the immunity from injury conferred by the 
69 



±QQ B00K v - CHAPTER V. §4. 

law and the tribunals, without the inconvenience of an 
appeal to them. 

§ 4. Besides the general taxes of the State, there are in 
all or most countries local taxes, to defray any expenses of 
a public nature which it is thought best to place under the 
control or management of a local authority. Some of these 
expenses are incurred for purposes in which the particular 
locality is solely or chiefly interested ; as the paving, cleans- 
ing, and lighting of the streets ; or the making and repair- 
ing of roads and bridges, which may be important to people 
from any part of the country, but only in so far as they, or 
goods in which they have an interest, pass along the roads 
or over the bridges. In other cases again, the expenses are 
of a kind as nationally important as any others, but are 
defrayed locally because supposed more likely to be well 
administered by local bodies ; as, in England, the relief of 
the poor and the support of gaols, and in some other coun- 
tries, of schools. To decide for what public objects local 
superintendence is best suited, and what are those which 
should be kept immediately under the central government, 
or under a mixed system of local management and central 
superintendence, is a question not of political economy, but of 
administration. It is an important principle, however, that 
taxes imposed by a local authority, being less amenable to 
publicity and discussion than the acts of the government, 
should always be special — laid on for some definite service, 
and not exceeding the expense actually incurred in render- 
ing the service. Thus limited, it is desirable, whenever 
practicable, that the burden should fall on those to whom 
the service is rendered ; that the expense, for instance, of 
roads and bridges, should be defrayed by a toll on passengers 
and goods conveyed by them, thus dividing the cost between 
those who use them for pleasure or convenience, and the 
consumers of the goods which they enable to be brought to 
and from the market at a diminished expense. When, 
however, the tolls have repaid with interest the whole of the 



MISCELLANEOUS TAXES. 467 

expenditure, the road or bridge should be thrown open free 
of toll, that it may be used also by those to whom, unless 
open gratuitously, it would be valueless ; provision being 
made for repairs either from the funds of the state, or by a 
rate levied on the localities which reap the principal 
benefit. 

In England, almost all local taxes are direct, (the coal 
duty of the City of London, and a few similar imposts, 
being the chief exceptions,) though the greatest part of the 
taxation for general purposes is indirect. On the contrary, 
in France, Austria, and other countries where direct taxa- 
tion is much more largely employed by the state, the local 
expenses of towns are principally defrayed by taxes levied 
on commodities when entering them. These indirect taxes 
are much more objectionable in towns than on the frontier, 
because the things which the country supplies to the towns 
are chiefly the necessaries of life and the materials of manu- 
facture, while of what a country imports from foreign coun- 
tries, the greater part usually consists of luxuries. An octroi 
cannot produce a large revenue, without pressing severely 
upon the labouring classes of the towns ; unless their wages 
rise proportionally, in which case the tax falls in a great 
measure on the consumers of town produce, whether residing 
in town or country, since capital will not remain in the 
towns if its profits fall below their ordinary proportion as 
compared with the rural districts. 



CHAPTEE VI. 

COMPARISON BETWEEN DIRECT AND INDIRECT TAXATION. 

§ 1. Are direct or indirect taxes the most eligible? 
This question, at all times interesting, has of late excited a 
considerable amount of discussion. In England there is a 
popular feeling, of old standing, in favour of indirect, or it 
should rather be said in opposition to direct, taxation. The 
feeling is not grounded on the merits of the case, and is 
of a puerile kind. An Englishman dislikes, not so much 
the payment as the act of paying. He dislikes seeing the 
face of the tax-collector, and being subjected to his peremp- 
tory demand. Perhaps, too, the money which he is required 
to pay directly out of his pocket is the only taxation which 
he is quite sure that he pays at all. That a tax of two shil- 
lings per pound on tea, or of three shillings per bottle on 
wine, raises the price of each pound of tea and bottle of wine 
which he consumes, by that and more than that amount, 
cannot indeed be denied ; it is the fact, and is intended to 
be so, and he himself at times, is perfectly aware of it ; 
but it makes hardly any impression on his practical feelings 
and associations, serving to illustrate the distinction between 
what is merely known to be true and what is felt to be so. 
The unpopularity of direct taxation, contrasted with the 
easy manner in which the public consent to let themselves 
be fleeced in the prices of commodities, has generated in 
many friends of improvement a directly opposite mode of 
thinking to the foregoing. They contend that the very 
reason which makes direct taxation disagreeable, makes it 



DIRECT AND INDIRECT TAXES COMPARED. 469 

preferable. Under it, every one knows how much he really 
pays ; and if he votes for a war, or any other expensive 
national luxury, he does so with his eyes open to what it 
costs him. If all taxes were direct, taxation would be much 
more perceived than at present ; and there would be a 
security which now there is not, for economy in the public 
expenditure. 

Although this argument is not without force, its weight 
is likely to be constantly diminishing. The real incidence 
of indirect taxation is every day more generally understood 
and more familiarly recognized : and whatever else may be 
said of the changes which are taking place in the tendencies 
of the human mind, it can scarcely, I think, be denied, that 
things are more and more estimated according to their 
calculated value, and less according to their non-essential 
accompaniments. The mere distinction between paying 
money directly to the tax-collector, and contributing the same 
sum through the intervention of the tea-dealer or the 
wine-merchant, no longer makes the whole difference 
between dislike or opposition, and passive acquiescence. 
But further, while any such infirmity of the popular mind 
subsists, the argument grounded on it tells partly on the 
other side of the question. If our present revenue of above 
seventy millions were all raised by direct taxes, an extreme 
dissatisfaction would certainly arise at having to pay so 
much ; but while men's minds are so little guided by reason, 
as such a change of feeling from so irrelevant a cause 
would imply, so great an aversion to taxation might not 
be an unqualified good. Of the seventy millions in question, 
nearly thirty are pledged, under the most binding obligations, 
to those whose property has been borrowed and spent by 
the state : and while this debt remains unredeemed, a 
greatly increased impatience of taxation would involve no 
little danger of a breach of faith, similar to that which, 
in the defaulting states of America, has been produced, 
and in some of them still continues, from the same cause. 
That part, indeed, of the public expenditure, which is 



470 BOOK V. CHAPTER VI. § 1. 

devoted to the maintenance of civil and military establish- 
ments, (that is, all except the interest of the national debt) 
affords in many of its details, ample scope for retrenchment. 
But while much of the revenue is wasted under the mere 
pretence of public service, so much of the most important 
business of government is left undone, that whatever can 
be rescued from useless expenditure is urgently required 
for useful. Whether the object be education ; a more effi- 
cient and accessible administration of justice ; emigration 
and colonization ; reforms of any kind which, like the Slave 
Emancipation, require compensation to individual interests ; 
or what is as important as any of these, the entertainment 
of a sufficient staff of able and educated public servants, to 
conduct in a better than the present awkward manner the 
business of legislation and administration ; every one of these 
things implies considerable expense, and many of them have 
again and again been prevented by the reluctance which 
existed to apply to Parliament for an increased grant of pub- 
lic money, though (besides that the existing means would be 
more than sufficient if applied to the proper purposes) 
the cost would be repaid, often a hundred-fold, in mere 
pecuniary advantage to the community generally. If so 
great an addition were made to the public dislike of taxa- 
tion as might be the consequence of confining it to the 
direct form, the classes who profit by the misapplication of 
public money might probably succeed in saving that by 
which they profit, at the expense of that which would only 
be useful to the public. 

There is, however, a frequent plea in support of indirect 
taxation, which must be altogether rejected, as grounded 
on a fallacy. We are often told that taxes on commodities 
are less burdensome than other taxes, because the con- 
tributor can escape from them by ceasing to use the taxed 
commodity. He certainly can, if that be his object, deprive 
the government of the money ; but he does so by a sacrifice 
of his own indulgences, which (if he chose to undergo it) 
would equally make up to him for the same amount taken 



DIRECT AND INDIRECT TAXES COMPARED. 471 

from him by direct taxation. Suppose a tax laid on wine, 
sufficient to add five pounds to the price of the quantity of 
wine which he consumes in a year. He has only (we are 
told) to diminish his consumption of wine by 51., and he 
escapes the burden. True : but if the 51., instead of being 
laid on wine, had been taken from him by an income-tax, 
he could, by expending 51. less in wine, equally save the 
amount of the tax, so that the difference between the two 
cases is really illusory. If the government takes from the 
contributor five pounds a year, whether in one way or 
another, exactly that amount must be retrenched from his 
consumption to leave him as well off as before ; and in 
either way the same amount of sacrifice, neither more nor 
less, is imposed on him. 

On the other hand, it is some advantage on the side of 
indirect taxes, that what they exact from the contributor is 
taken at a time and in a manner likely to be convenient to 
him. It is paid at a time when he has at any rate a pay- 
ment to make ; it causes, therefore, no additional trouble, 
nor (unless the tax be on necessaries) any inconvenience but 
what is inseparable from the payment of the amount. He 
can also, except in the case of very perishable articles, 
select his own time for laying in a stock of the commodity, 
and consequently for payment of the tax. The producer 
or dealer who advances these taxes, is, indeed, sometimes 
subjected to inconvenience ; but, in the case of imported 
goods, this inconvenience is reduced to a minimum by what 
is called the Warehousing System, under which, instead of 
paying the duty at the time of importation, he is only re- 
quired to do so when he takes out the goods for consumption, 
which is seldom done until he has either actually found, or 
has the prospect of immediately finding, a purchaser. 

The strongest objection, however, to raising the whole 
or the greater part of a large revenue by direct taxes, is 
the impossibility of assessing them fairly without a conscien- 
tious co-operation on the part of the contributors, not to be 
hoped for in the present low state of public morality. In 



472 BOOK V. CHAPTER VI. §1. 

the case of an income-tax, we have already seen that unless 
it be found practicable to exempt savings altogether from 
the tax, the burthen cannot be apportioned with any tolera- 
ble approach to fairness upon those whose incomes are de- 
rived from business or professions ; and this is in fact ad- 
mitted by most of the advocates of direct taxation, who, 
I am afraid, generally get over the difficulty by leaving 
those classes untaxed, and confining their projected in- 
come-tax to " realized property," in which form it certainly 
has the merit of being a very easy form of plunder. 
But enough has been said in condemnation of this expe- 
dient. "We have seen, however, that a house-tax is a form 
of direct taxation not liable to the same objections as an 
income-tax, and indeed liable to as few objections of any 
kind as perhaps any of our indirect taxes. But it would be 
impossible to raise, by a house-tax alone, the greatest part 
of the revenue of Great Britain, without producing a very 
objectionable over-crowding of the population, through the 
strong motive which all persons would have to avoid the 
tax by restricting their house accommodation. Besides, 
even a house-tax has inequalities, and consequent injustices ; 
no tax is exempt from them, and it is neither just nor politic 
to make all the inequalities fall in the same places, by calling 
upon one tax to defray the whole or the chief part of the 
public expenditure. So much of the local taxation, in this 
country, being already in the form of a house-tax, it is pro- 
bable that ten millions a year would be fully as much as could 
beneficially be levied, through this medium, for general 
purposes. 

A certain amount of revenue may, as we have seen, be 
obtained without injustice by a peculiar tax on rent. 
Besides the present land-tax, and an equivalent for the 
revenue now derived from stamp duties on the conveyance 
of land, some further taxation might, I have contended, at 
some future period be imposed, to enable the state to par- 
ticipate in the progressive increase of the incomes of land- 
lords from natural causes. Legacies and inheritances, we 



DIRECT AND INDIRECT TAXES COMPARED. 473 

have also seen, ought to be subjected to taxation sufficient 
to yield a considerable revenue. With these taxes, and a 
house-tax of suitable amount, we should, I think, have 
reached the prudent limits of direct taxation, save in a 
national emergency so urgent as to justify the government 
in disregarding the amount of inequality and unfairness 
which may ultimately be found inseparable from an income- 
tax. The remainder of the revenue would have to be pro- 
vided by taxes on consumption, and the question is, which 
of these are the least objectionable. 

§ 2. There are some forms of indirect taxation which 
must be peremptorily excluded. Taxes on commodities, for 
revenue purposes, must not operate as protecting duties, 
but must be levied impartially on every mode in which the 
articles can be obtained, whether produced in the country 
itself, or imported. An exclusion must also be put upon all 
taxes on the necessaries of life, or on the materials or instru- 
ments employed in producing those necessaries. Such 
taxes are always liable to encroach on what should be left 
untaxed, the incomes barely sufficient for healthful exist- 
ence ; and on the most favourable supposition, namely, that 
wages rise to compensate the labourers for the tax, it oper- 
ates as a peculiar tax on profits, which is at once unjust, 
and detrimental to national wealth.* What remain are 
taxes on luxuries. And these have some properties which 
strongly recommend them. In the first place, they can 
never, by any possibility, touch those whose whole income 
is expended on necessaries ; while they do reach those by 

* Some argue that the materials and instruments of all production should 
be exempt from taxation ; but these, when they do not enter into the production 
of necessaries, seem as proper subjects of taxation as the finished article. It is 
chiefly with reference to foreign trade, that such taxes have been considered in- 
jurious. Internationally speaking, they may be looked upon as export duties, 
and, unless in cases in which an export duty is advisable, they should be accom- 
panied with an equivalent drawback on exportation. But there is no sufficient 
reason against taxing the materials and instruments used in the production of 
anything which is itself a fit object of taxation. 



474 BOOK V. CHAPTER VI. §2. 

whom what is required for necessaries, is expended on in- 
dulgences. In the next place, they operate in some cases as 
an useful, and the only useful, kind of sumptuary law. I 
disclaim all asceticism, and by no means wish to see dis- 
couraged, either by law or opinion, any indulgence (consis- 
tent with the means and obligations of the person using it) 
which is sought from a genuine inclination for, and enjoy- 
ment of, the thing itself ; but a great portion of the expense 
of the higher and middle classes in most countries, and the 
greatest in this, is not incurred for the sake of the pleasure 
afforded by the things on which the money is spent, but 
from regard to opinion, and an idea that certain expenses 
are expected from them, as an appendage of station ; and I 
cannot but think that expenditure of this sort is a most 
desirable subject of taxation. If taxation discourages it, 
some good is done, and if not, no harm ; for in so far as 
taxes are levied on things which are desired and possessed 
from motives of this description, nobody is the worse for 
them. When a thing is bought not for its use but for its 
costliness, cheapness is no recommendation. As Sismondi 
remarks, the consequence of cheapening articles of vanity, 
is not that less is expended on such things, but that the 
buyers substitute for the cheapened article some other which 
is more costly, or a more elaborate quality of the same 
thing ; and as the inferior quality answered the purpose of 
vanity equally well when it was equally expensive, a tax on 
the article is really paid by nobody : it is a creation of pub- 
lic revenue by which nobody loses.* 

* " Were we to suppose that diamonds could only be procured from one 
particular and distant country, and pearls from another, and were the produce 
of the mines in the former, and of the fishery in the latter, from the operation 
of natural causes, to become doubly difficult to procure, the effect would merely 
be that in time half the quantity of diamonds and pearls would be sufficient to 
mark a certain opulence and rank, that it had before been necessary to employ 
for that purpose. The same quantity of gold, or some commodity reducible at 
last to labour, would be required to produce the now reduced amount, as the 
former larger amount. Were the difficulty interposed by the regulations of 
legislators it could make no difference to the fitness of these 



DIRECT AND INDIRECT TAXES COMPARED. 475 

§ 3. In order to reduce as much as possible the incon- 
veniences, and increase the advantages, incident to taxes on 
commodities, the following are the practical rules which 
suggest themselves. 1st. To raise as large a revenue as 
conveniently may be, from those classes of luxuries which 
have most connection with vanity, and least with positive 
enjoyment ; such as the more costly qualities of all kinds of 
personal equipment and ornament. 2dly. Whenever possi- 
ble, to demand the tax, not from the producer, but directly 
from the consumer, since when levied on the producer it 
raises the price always by more, and often by much more, 
than the mere amount of the tax. Most of the minor as- 
iessed taxes in this country are recommended by both these 
considerations. But with regard to horses and carriages, 
as there are many persons to whom, from health or consti- 
tution, these are not so much luxuries as necessaries, the tax 
paid by those who have but one riding horse, or but one 
carriage, especially of the cheaper descriptions, should be 
low ; while taxation should rise very rapidly with the num- 
ber of horses and carriages, and with their costliness. 3dly. 

articles to serve the purposes of vanity." Suppose that means were discovered 
whereby the physiological process which generates the pearl might be induced 
ad libitum, the result being that the amount of labour expended in procuring 
each pearl, came to be only the five hundredth part of what it was before. " The 
ultimate effect of such a change would depend on whether the fishery were free 
or not. Were it free to all, as pearls could be got simply for the labour of fish- 
ing for them, a string of them might be had for a few pence. The very poorest 
class of society could therefore afford to decorate their persons with them. They 
would thus soon become extremely vulgar and unfashionable, and so at last 
valueless. If however we suppose that instead of the fishery being free, the 
legislator owns and has complete command of the place, where alone pearls are 
to be procured ; as the progress of discovery advanced, he might impose a duty 
on them equal to the diminution of labour necessary to procure them. They 
would then be as much esteemed as they were before. What simple beauty 
they have would remain unchanged. The difficulty to be surmounted in order 
to obtain them would be different, but equally great, and they would therefore 
equally serve to mark the opulence of those who possessed them." The net 
revenue obtained by such a tax " would not cost the society anything. If not 
abused in its application, it would be a clear addition of so much to the resources 
»f the community." — Rae, New Principles of Political Economy, pp. 369-71. 



476 BOOK V. CHAPTER VI. §3. 

But as the only indirect taxes which yield a large revenue 
are those which fall on articles of universal or very general 
consumption, and as it is therefore necesssary to have some 
taxes on real luxuries, that is, on things which afford pleas- 
ure in themselves, and are valued on that account rather 
than for their cost ; these taxes should, if possible, be so ad- 
justed as to fall with the same proportional weight on small, 
on moderate, and on large incomes. This is not an easy 
matter ; since the things which are the subjects of the more 
productive taxes, are in proportion more largely consumed 
by the poorer members of the community than by the rich. 
Tea, coffee, sugar, tobacco, fermented drinks, can hardly be 
so taxed, that the poor shall not bear more than their due 
share of the burthen. Something might be done by making 
the duty on the superior qualities, which are used by the 
richer consumers, much higher in proportion to the value, 
(instead of much lower, as is almost universally the practice 
under the present English system) ; but in some cases the 
difficulty of at all adjusting the duty to the value, so as to 
prevent evasion, is said, with what truth I know not, to be 
insuperable ; so that it is thought necessary to levy the 
same fixed duty on all the qualities alike : a flagrant injust- 
ice to the poorer class of contributors, unless compensated 
by the existence of other taxes from which, as from the 
present income-tax, they are altogether exempt. 4thly. As 
far as is consistent with the preceding rules, taxation should 
rather be concentrated on a few articles than diffused over 
many, in order that the expenses of collection may be 
smaller, and that as few employments as possible may be 
burthensomely and vexatiously interfered with. 5thly. 
Among luxuries of general consumption, taxation should by 
preference attach itself to stimulants, because these, though 
in themselves as legitimate indulgences as any others, are 
more liable than most others to be used in excess, so that 
the check to consumption, naturally arising from taxation, 
is on the whole better applied to them than to other things. 
6thly. As far as other considerations permit, taxation should 



DIRECT AND INDIRECT TAXES COMPARED. 477 

be confined to imported articles, since these can be taxed 
with a less degree of vexatious interference, and with fewer 
incidental bad effects, than when a tax is levied on the field 
or on the workshop. Custom duties are, cceteris paribus, 
much less objectionable than excise : but they must be laid 
only on things which either cannot, or at least will not, be 
produced in the country itself; or else their production there 
must be prohibited (as in England is the case with tobacco,) 
or subjected to an excise duty of equivalent amount. Tthly. 
No tax ought to be kept so high as to furnish a motive to 
its evasion, too strong to be counteracted by ordinary means 
of prevention : and especially no commodity should be taxed 
so highly as to raise up a class of lawless characters, 
smugglers, illicit distillers, and the like. 

Of the excise and custom duties lately existing in this 
country, all which are intrinsically unfit to form part of a 
good system of taxation, have, since the last reforms by 
Mr. Gladstone, been got rid of. Among these are all duties 
on ordinary articles of food, whether for human beings or 
for cattle ; those on timber, as falling on the materials of 
lodging, which is one of the necessaries of life ; all duties on 
the metals, and on implements made of them ; taxes on 
soap, which is a necessary of cleanliness, and on tallow, the 
material both of that and of some other necessaries ; the tax 
on paper, an indispensable instrument of almost all business 
and of most kinds of instruction. The duties which now 
yield nearly the whole of the customs and excise revenue, 
those on sugar, coffee, tea, wine, beer, spirits, and tobacco, 
are in themselves, where a large amount of revenue is neces- 
sary, extremely proper taxes ; but at present grossly unjust, 
from the disproportionate weight with which they press on 
the poorer classes ; and some of them (those on spirits and 
tobacco) are so high as to cause a considerable amount of 
smuggling. It is probable that most of these taxes might 
bear a great reduction without any material loss of reve- 
nue. In what manner the finer articles of manufacture, 
consumed by the rich, might most advantageously be taxed, 



478 B0° K V- CHAPTER VI. §3. 

1 must leave to be decided by those who have the requisite 
practical knowledge. The difficulty would be, to effect it 
without an inadmissible degree of interference with produc- 
tion. In countries which, like the United States, import 
the principal part of the finer manufactures which they con- 
sume, there is little difficulty in the matter : and even where 
nothing is imported but the raw material, that may be 
taxed, especially the qualities of it which are exclusively 
employed for the fabrics used by the richer class of con- 
sumers. Thus, in England a high custom duty on raw silk 
would be consistent with principle ; and it might perhaps 
be practicable to tax the finer qualities of cotton or linen 
yarn, whether spun in the country itself or imported. 



CHAPTER VII. 

OF A NATIONAL DEBT. 

§ 1. The question must now be considered, how far it 
is right or expedient to raise money for the purposes of gov- 
ernment, not by laying on taxes to the amount required, 
but by taking a portion of the capital of the country in the 
form of a loan, and charging the public revenue with only 
the interest. Nothing needs be said about providing for 
temporary wants by taking up money ; for instance, by an 
issue of exchequer bills, destined to be paid off, at furthest 
in a year or two, from the proceeds of the existing taxes. 
This is a convenient expedient, and when the government 
does not possess a treasure or hoard, is often a necessary 
one, on the occurrence of extraordinary expenses, or of a 
temporary failure in the ordinary sources of revenue. What 
we have to discuss is the propriety of contracting a national 
debt of a permanent character ; defraying the expenses of a 
war, or of any season of difficulty, by loans, to be redeemed 
either very gradually and at a distant period, or not at all. 

This question has already been touched upon in the First 
Book.* We remarked, that if the capital taken in loans is 
abstracted from funds either engaged in production, or des- 
tined to be employed in it, their diversion from that purpose 
is equivalent to taking the amount from the wages of the 
labouring classes. Borrowing, in this case, is not a substi- 
tute for raising the supplies within the year. A government 
which borrows does actually take the amount within the 

* Supra, vol. i. pp. 110-14. 



480 B00K v - CHAPTER VII. §1. 

year, and that too by a tax exclusively on the labouring 
classes : than which it could have done nothing worse, if 
it had supplied its wants by avowed taxation ; and in that 
case the transaction, and its evils, would have ended with 
the emergency ; while by the circuitous mode adopted, the 
value exacted from the labourers is gained, not by the state, 
but by the employers of labour, the state remaining charged 
with the debt besides, and with its interest in perpetuity. 
The system of public loans, in such circumstances, may be 
pronounced the very worst which, in the present state of 
civilization, is still included in the catalogue of financial ex- 
pedients. 

We however remarked that there are other circum- 
stances in which loans are not chargeable with these perni- 
cious consequences : namely, first, when what is borrowed is 
foreign capital, the overflowings of the general accumula- 
tion of the world ; or, secondly, when it is capital which 
either would not have been saved at all unless this mode of 
investment had been open to it, or after being saved, would 
have been wasted in unproductive enterprises, or sent to 
seek employment in foreign countries. When the progress 
of accumulation has reduced profits either to the ultimate 
or to the practical minimum, — to the rate, less than which 
would either put a stop to the increase of capital, or send 
the whole of the new accumulations abroad ; government 
may annually intercept these new accumulations, without 
trenching on the employment or wages of the labouring 
classes in the country itself, or perhaps in any other country. 
To this extent, therefore, the loan system may be carried, 
without being liable to the utter and peremptory condemna- 
tion which is due to it when it overpasses this limit. What 
is wanted is an index to determine whether, in any given 
series of years, as during the last great war for example, the 
limit has been exceeded or not. 

Such an index exists, at once a certain and an obvious 
one. Did the government, by its loan operations, augment 
the rate of interest ? If it only opened a channel for capital 



A NATIONAL DEBT. 481 

which would not otherwise have been accumulated, or 
which, if accumulated, would not have been employed 
within the country ; this implies that the capital, which the 
government took and expended, could not have found em- 
ployment at the existing rate of interest. So long as the 
loans do no more than absorb this surplus, they prevent any 
tendency to a fall of the rate of interest, but they cannot 
occasion any rise. When they do raise the rate of interest, 
as they did in a most extraordinary degree during the 
French war, this is positive proof that the government is a 
competitor for capital with the ordinary channels of produc- 
tive investment, and is carrying off, not merely funds which 
would not, but funds which would, have found productive 
employment within the country. To the full extent, there- 
fore, to which the loans of government, during the war, 
caused the rate of interest to exceed what it was before, and 
what it has been since, those loans are chargeable with all 
the evils which have been described. If it be objected that 
interest only rose because profits rose, I reply that this does 
not weaken, but strengthens, the argument. If the govern- 
ment loans produced the rise of profits by the great amount 
of capital which they absorbed, by what means can they have 
had this effect, unless by lowering the wages of labour ? It 
will perhaps be said, that what kept profits high during the 
war was not the drafts made on the national capital by the 
loans, but the rapid progress of industrial improvements. 
This, in a great measure, was the fact ; and it no doubt al- 
leviated the hardship to the labouring classes, and made the 
financial system which was pursued less actively mischiev- 
ous, but not less contrary to principle. These very im- 
provements in industry, made room for a larger amount of 
capital ; and the government, by draining away a great part 
of the annual accumulations, did not indeed prevent that 
capital from existing ultimately, (for it started into existence 
with great rapidity after the peace,) but prevented it from 
existing at the time, and subtracted just so much, while the 
war lasted, from distribution among productive labourers. 
70 



482 BOOK V. CHAPTER VII. §1. 

If the government had abstained from taking this capital by- 
loan, and had allowed it to reach the labourers, but had 
raised the supplies which it required by a direct tax on the 
labouring classes, it would have produced (in every respect 
but the expense and inconvenience of collecting the tax) the 
very same economical effects which it did produce, except 
that we should not now have had the debt. The course it 
actually took was therefore worse than the very worst mode 
which it could possibly have adopted of raising the supplies 
within the year : and the only excuse, or justification, which 
it admits of, (so far as that excuse could be truly pleaded) was 
hard necessity ; the impossibility of raising so enormous an 
annual sum by taxation, without resorting to taxes which 
from their odiousness, or from the facility of evasion, it 
would have been found impracticable to enforce. 

"When government loans are limited to the overflowings 
of the national capital, or to those accumulations which 
would not take place at all unless suffered to overflow, they 
are at least not liable to this grave condemnation : they oc- 
casion no privation to any one at the time, except by the 
payment of the interest, and may even be beneficial to the 
labouring class during the term of their expenditure, by 
employing in the direct purchase of labour, as that of soldiers, 
sailors, &c, funds which might otherwise have quitted the 
country altogether. In this case therefore the question really 
is, what it is commonly supposed to be in all cases, namely, a 
choice between a great sacrifice at once, and a small one in- 
definitely prolonged. On this matter it seems rational to 
think, that the prudence of a nation will dictate the same 
conduct as the prudence of an individual ; to submit to as 
much of the privation immediately, as can easily be borne, 
and only when any further burthen would distress or crip- 
ple them too much, to provide for the remainder by mort- 
gaging their future income. It is an excellent maxim to 
make present resources suffice for present wants ; the future 
will have its own wants to provide for. On the other hand, 
it may reasonably be taken into consideration that in a 



A NATIONAL DEBT. 483 

country increasing in wealth, the necessary expenses of gov- 
ernment do not increase in the same ratio as capital or pop- 
ulation ; any burthen, therefore, is always less and less felt : 
and since those extraordinary expenses of government which 
are fit to be incurred at all, are mostly beneficial beyond the 
existing generation, there is no injustice in making posterity 
pay a part of the price, if the inconvenience would be ex- 
treme of defraying the whole of it by the exertions and 
sacrifices of the generation which first incurred it. 

§ 2. "When a country, wisely or unwisely, has bur- 
thened itself with a debt, is it expedient to take steps for re- 
deeming that debt ? In principle it is impossible not to 
maintain the affirmative. It is true that the payment of 
the interest, when the creditors are members of the same 
community, is no national loss, but a mere transfer. The 
transfer, however, being compulsory, is a serious evil, and 
the raising a great extra revenue by any system of taxation 
necessitates so much expense, vexation, disturbance of the 
channels of industry, and other mischiefs over and above 
the mere payment of the money wanted by the government, 
that to get rid of the necessity of such taxation is at all 
times worth a considerable effort. The same amount of 
sacrifice which would have been worth incurring to avoid 
contracting the debt, it is worth while to incur, at any sub- 
sequent time, for the purpose of extinguishing it. 

Two modes have been contemplated of paying off a na- 
tional debt : either at once by a general contribution, or 
gradually by a surplus revenue. The first would be incom- 
parably the best, if it were practicable ; and it would be 
practicable if it could justly be done by assessment on prop- 
erty alone. If property bore the whole interest of the debt, 
property might, with great advantage to itself, pay it off; 
since this would be merely surrendering to a creditor the 
principal sum, the whole annual proceeds of which were 
already his by law ; and would be equivalent to what a 
landowner does when he sells part of his estate, to free the 



484 BOOK V. CHAPTER VII. §2. 

remainder from a mortgage. But property, it needs hardly 
be said, does not pay, and cannot justly be required to 
pay, the whole interest of the debt. Some indeed affirm 
that it can, on the plea that the existing generation is only 
bound to pay the debts of its predecessors from the assets it 
has received from them, and not from the produce of its own 
industry. But has no one received anything from previous 
generations except those who have succeeded to property ? 
Is the whole difference between the earth as it is, with its 
clearings and improvements, its roads and canals, its towns 
and manufactories, and the earth as it was when the first 
human being set foot on it, of no benefit to any but those 
who are called the owners of the soil ? Is the capital accu- 
mulated by the labour and abstinence of all former genera- 
tions of no advantage to any but those who have succeeded 
to the legal ownership of part of it ? And have we not in- 
herited a mass of acquired knowledge, both scientific and 
empirical, due to the sagacity and industry of those who 
preceded us, the benefits of which are the common wealth 
of all ? Those who are born to the ownership of property 
have, in addition to these common benefits, a separate inher- 
itance, and to this difference it is right that advertence 
should be had in regulating taxation. It belongs to the 
general financial system of the country to take due account 
of this principle, and I have indicated, as in my opinion a 
proper mode of taking account of it, a considerable tax on 
legacies and inheritances. Let it be determined directly and 
openly what is due from property to the state, and from the 
state to property, and let the institutions of the state be reg- 
ulated accordingly. Whatever is the fitting contribution 
from property to the general expenses of the state, in the 
same, and in no greater proportion should it contribute 
towards either the interest or the repayment of the national 
debt. 

This, however, if admitted, is fatal to any scheme for the 
extinction of the debt by a general assessment on the com- 
munity. Persons of property could pay their share of the 



A NATIONAL DEBT. 485 

amount by a sacrifice of property, and have the same net 
income as before ; but if those who have no accumulations, 
but only incomes, were required to make up by a single 
payment the equivalent of the annual charge laid on them 
by the taxes maintained to pay the interest of the debt, they 
could only do so by incurring a private debt equal to their 
share of the public debt ; while, from the insufficiency, in 
most cases, of the security which they could give, the inter- 
est would amount to a much larger annual sum than their 
share of that now paid by the state. Besides, a collective 
debt defrayed by taxes, has over the same debt parcelled 
out among individuals, the immense advantage, that it is 
virtually a mutual insurance among the contributors. If 
the fortune of a contributor diminishes, his taxes diminish ; 
if he is ruined, they cease altogether, and his portion of the 
debt is wholly transferred to the solvent members of the 
community. If it were laid on him as a private obligation, 
he would still be liable to it, even when penniless. 

"When the state possesses property, in land or otherwise, 
which there are not strong reasons of public utility for its 
retaining at its disposal, this should be employed, as far as 
it will go, in extinguishing debt. Any casual gain, or god- 
send, is naturally devoted to the same purpose. Beyond 
this, the only mode which is both just and feasible, of extin- 
guishing or reducing a national debt, is by means of a sur- 
plus revenue. 

§ 3. The desirableness, per se, of maintaining a surplus 
for this purpose does not, I think, admit of a doubt, We 
sometimes, indeed, hear it said that the amount should 
rather be left to " fructify in the pockets of the people." 
This is a good argument, as far as it goes, against levying 
taxes unnecessarily for purposes of unproductive expendi- 
ture, but not against paying off a national debt. For, what 
is meant by the word fructify ? If it means anything, it 
means productive employment; and as an argument against 
taxation, we must understand it to assert, that if the amount 



486 BOOK V. CHAPTER VII. §3. 

were left with the people they would save it, and convert it 
into capital. It is probable, indeed, that they would save a 
part, but extremely improbable that they would save # the 
whole : while if taken by taxation, and employed in paying 
off debt, the whole is saved, and made productive. To the 
fundholder who receives the payment it is already capital, 
not revenue, and he will make it " fructify," that it may 
continue to afford him an income. The objection, therefore, 
is not only groundless, but the real argument is on the other 
side : the amount is much more certain of fructifying if it is 
not " left in the pockets of the people." 

It is not, however, advisable in all cases to maintain a 
surplus revenue for the extinction of debt. The advantage 
of paying off the national debt of Great Britain, for instance, 
is that it would enable us to get rid of the worse half of our 
taxation. But of this worse half some portions must be 
worse than others, and to get rid of those would be a greater 
benefit proportionally than to get rid of the rest. If re- 
nouncing a surplus revenue would enable us to dispense 
with a tax, we ought to consider the very worst of all our 
taxes as precisely the one which we are keeping up for the 
sake of ultimately abolishing taxes not so bad as itself. In 
a country advancing in wealth, whose increasing revenue 
gives it the power of ridding itself from time to time of the 
most inconvenient portions of its taxation, I conceive that 
the increase of revenue should rather be disposed of by tak- 
ing off taxes, than by liquidating debt, as long as any very 
objectionable imposts remain. In the present state of Eng- 
land, therefore, I hold it to be good policy in the govern- 
ment, when it has a surplus of an apparently permanent 
character, to take off taxes, provided these are rightly se- 
lected. Even when no taxes remain but such as are not 
unfit to form part of a permanent system, it is wise to con- 
tinue the same policy by experimental reductions of those 
taxes, until the point is discovered at which a given amount 
of revenue can be raised with the smallest pressure on the 
contributors. After this, such surplus revenue as might 



A NATIONAL DEBT. 487 

arise from any further increase of the produce of the taxes, 
should not, I conceive, be remitted, but applied to the re- 
demption of debt. Eventually, it might be expedient to ap- 
propriate the entire produce of particular taxes to this pur- 
pose ; since there would be more assurance that the liqui- 
dation would be persisted in, if the fund destined to it were 
kept apart, and not blended with the general revenues of 
the state. The succession duties would be peculiarly suited 
to such a purpose, since taxes paid as they are, out of capi- 
tal, would be better employed in reimbursing capital than 
in defraying current expenditure. If this separate appro- 
priation were made, any surplus afterwards arising from the 
increasing produce of the other taxes, and from the saving 
of interest on the successive portions of debt paid off', might 
form a ground for a remission of taxation. 

It has been contended that some amount of national debt 
is desirable, and almost indispensable, as an investment for 
the savings of the poorer or more inexperienced part of the 
community. Its convenience in that respect is undeniable ; 
but (besides that the progress of industry is gradually 
affording other modes of investment almost as safe and un- 
troublesome, such as the shares or obligations of great pub- 
lic companies) the only real superiority of an investment in 
the funds consists in the national guarantee, and this could 
be afforded by other means than that of a public debt, in- 
volving compulsory taxation. One mode which would an- 
swer the purpose, would be a national bank of deposit and 
discount, with ramifications throughout the country ; which 
might receive any money confided to it, and either fund it 
at a fixed rate of interest, or allow interest on a floating bal- 
ance, like the joint stock banks ; the interest given being of 
course lower than the rate at which individuals can borrow, 
in proportion to the greater security of a government invest- 
ment ; and the expenses of the establishment being defrayed 
by the difference between the interest which the bank 
would pay, and that which it would obtain, by lending its 
deposits on mercantile, landed, or other security. There are 



488 BOOK V. CHAPTER VII. §3. 

no insuperable objections in principle, nor, I should think, 
in practice, to an institution of this sort, as a means of sup- 
plying the same convenient mode of investment now afford- 
ed by the public funds. It would constitute the state a 
great insurance company, to insure that part of the com- 
munity who live on the interest of their property, against 
the risk of losing it by the bankruptcy of those to whom 
they might otherwise be under the necessity of confiding it. 



CHAPTEK VIII. 

OF THE ORDINARY FUNCTIONS OF GOVERNMENT, CONSIDERED 
AS TO THEIR ECONOMICAL EFFECTS. 

§ 1. Before we discuss the line of demarcation between 
the things with which government should, and those with 
which they should not, directly interfere, it is necessary to 
consider the economical effects, whether of a bad or of a 
good complexion, arising from the manner in which they 
acquit themselves of the duties which devolve on them in 
all societies, and which no one denies to be incumbent on 
them. 

The first of these is the protection of person and proper- 
ty. There is no need to expatiate on the influence exer- 
cised over the economical interests of society by the degree 
of completeness with which this duty of government is per- 
formed. Insecurity of person and property, is as much as 
to say, uncertainty of the connexion between all human 
exertion or sacrifice, and the attainment of the ends for the 
sake of which they are undergone. It means, uncertainty 
whether they who sow shall reap, whether they who pro- 
duce shall consume, and they who spare to-day shall enjoy 
to-morrow. It means, not only that labour and frugality 
are not the road to acquisition, but that violence is. "When 
person and property are to a certain degree insecure, all the 
possessions of the weak are at the mercy of the strong. No 
one can keep what he has produced, unless he is more ca- 
pable of defending it, than others who give no part of their 
time and exertions to useful industry are of taking it from 



490 BOOK V. CHAPTER VIII. § 1. 

him. The productive classes, therefore, when the insecurity 
surpasses a certain point, being unequal to their own pro- 
tection against the predatory population, are obliged to 
place themselves individually in a state of dependence on 
some member of the predatory class, that it may be his in- 
terest to shield them from all depredation except his own. 
In this manner, in the middle ages, allodial property gene- 
rally became feudal, and numbers of the poorer freemen 
voluntarily made themselves and their posterity serfs of 
some military lord. 

Nevertheless, in attaching to this great requisite, secu- 
rity of person and property, the importance which is justly 
due to it, we must not forget that even for economical pur- 
poses there are other things quite as indispensable, the pres- 
ence of which will often make up for a very considerable 
degree of imperfection in the protective arrangements of 
government. As was observed in a previous chapter,* the 
free cities of Italy, Flanders, and the Hanseatic league, were 
habitually in a state of such internal turbulence, varied by 
such destructive external wars, that person and property 
enjoyed very imperfect protection ; yet during several cen- 
turies they increased rapidly in wealth and prosperity, 
brought many of the industrial arts to a high degree of ad- 
vancement, carried on distant and dangerous voyages of ex- 
ploration and commerce with extraordinary success, became 
an overmatch in power for the greatest feudal lords, and 
could defend themselves even against the sovereigns of Eu- 
rope : because in the midst of turmoil and violence, the citi- 
zens of those towns enjoyed a certain rude freedom, under 
conditions of union and co-operation, which, taken together, 
made them a brave, energetic, and high-spirited people, and 
fostered a great amount of public spirit and patriotism. 
The prosperity of these and other free states in a lawless 
age, shows that a certain degree of insecurity, in some com- 
binations of circumstances, has good as well as bad effects, 
by making energy and practical ability the conditions of 

* Supra, vol. i. p. 154. 



ORDINARY FUNCTIONS OF GOVERNMENT. 491 

safety. Insecurity paralyzes, only when it is such in nature 
and in degree, that no energy, of which mankind in general 
are capable, affords any tolerable means of self-protection. 
And this is a main reason why oppression by the govern- 
ment, whose power is generally irresistible by any efforts 
that can be made by individuals, has so much more baneful 
an effect on the springs of national prosperity, than almost 
any degree of lawlessness and turbulence under free institu- 
tions. Nations have acquired some wealth, and made some 
progress in improvement, in states of social union so im- 
perfect as to border on anarchy : but no countries in which 
the people were exposed without limit to arbitrary exactions 
from the officers of government, ever yet continued to have 
industry or wealth. A few generations of such a govern- 
ment never fail to extinguish both. Some of the fairest, 
and once the most prosperous, regions of the earth, have, 
under the Roman and afterwards under the Turkish domin- 
ion, been reduced to a desert, solely by that cause. I say 
solely, because they would have recovered with the utmost 
rapidity, as countries always do, from the devastations of 
war, or any other temporary calamities. Difficulties and 
hardships are often but an incentive to exertion : what is 
fatal to it, is the belief that it will not be suffered to produce 
its fruits. 

§ 2. Simple over-taxation by government, though a great 
evil, is not comparable in the economical part of its mischiefs 
to exactions much more moderate in amount, which either 
subject the contributor to the arbitrary mandate of govern- 
ment officers, or are so laid on as to place skill, industry, and 
frugality, at a disadvantage. The burthen of taxation in our 
own country is very great, yet as every one knows its limit, 
and is seldom made to pay more than he expects and cal- 
culates on, and as the modes of taxation are not of such a 
kind as much to impair the motives to industry and economy, 
the sources of prosperity are little diminished by the pressure 
of taxation ; they may even, as some think, be increased, by 



492 BOOK V- CHAPTER VIE. §2. 

the extra exertions made to compensate for the pressure of 
the taxes. But in the barbarous despotisms of many coun- 
tries of the East, where taxation consists in fastening upon 
those who have succeeded in acquiring something, in order 
to confiscate it, unless the possessor buys its release by sub- 
mitting to give some large sum as a compromise, we cannot 
expect to find voluntary industry, or wealth derived from any 
source but plunder. And even in comparatively civilized 
countries, bad modes of raising a revenue have had effects 
similar in kind, though in an inferior degree. French writers 
before the Revolution represented the taille as a main cause 
of the backward state of agriculture, and of the wretched 
condition of the rural population ; not from its amount, but 
because, being proportioned to the visible capital of the cul- 
tivator, it gave him a motive for appearing poor, which 
sufficed to turn the scale in favour of indolence. The arbi- 
trary powers also of fiscal officers, of intendants and suhde- 
legues, were more destructive of prosperity than a far larger 
amount of exactions, because they destroyed security : there 
was a marked superiority in the condition of thepays d?etaU, 
which were exempt from this scourge. The universal venal- 
ity ascribed to Russian functionaries, must be an immense 
drag on the capabilities of economical improvement possessed 
so abundantly by the Russian empire : since the emoluments 
of public officers must depend on the success with which they 
can multiply vexations, for the purpose of being bought off 
by bribes. 

Yet mere excess of taxation, even when not aggravated 
by uncertainty, is, independently of its injustice, a serious 
economical evil. It may be carried so far as to discourage 
industry by insufficiency of reward. Very long before it 
reaches this point, it prevents or greatly cheeks accumula- 
tion, or causes the capital accumulated to be sent for invest- 
ment to foreign countries. Taxes which fall on profits, even 
though that kind of income may not pay more than its just 
share, necessarily diminish the motive to any saving except 
for investment in foreign countries where profits are higher. 



ORDINARY FUNCTIONS OF GOVERNMENT. 493 

Holland, for example, seems to have long ago reached the 
practical minimum of profits : already in the last century 
her wealthy capitalists had a great part of their fortunes in- 
vested in the loans and joint-stock speculations of other coun- 
tries : and this low rate of profit is ascribed to the heavy tax- 
ation, which had been in some measure forced on her by the 
circumstances of her position and history. The taxes indeed, 
besides their great amount, were many of them on neces- 
saries, a kind of tax peculiarly injurious to industry and accu- 
mulation. But when the aggregate amount of taxation is 
very great, it is inevitable that recourse must be had for part 
of it to taxes of an objectionable character. And any taxes 
on consumption, when heavy, even if not operating on profits, 
have something of the same effect, by driving persons of 
moderate means to live abroad, often taking their capital 
with them. Although I by no means join with those 
political economists who think no state of national exist- 
ence desirable in which there is not a rapid increase of 
wealth, I cannot overlook the many disadvantages to an 
independent nation from being brought prematurely to a 
stationary state, while the neighbouring countries continue 
advancing. 

§ 3. The subject of protection to person and property, 
considered as afforded by government, ramifies widely, into 
a number of indirect channels. It embraces, for example, 
the whole subject of the perfection or inefficiency of the 
means provided for the ascertainment of rights and the re- 
dress of injuries. Person and property cannot be considered 
secure where the administration of justice is imperfect, either 
from defect of integrity or capacity in the tribunals, or because 
the delay, vexation, and expense accompanying their oper- 
ation impose a heavy tax on those who appeal to them, and 
make it preferable to submit to any endurable amount of the 
evils which they are designed to remedy. In England there 
is no fault to be found with the administration of justice, in 
point of pecuniary integrity ; a result which the progress of 



494 B00K v - CHAPTER VIII. §3. 

social improvement may also be supposed to have brought 
about in several other nations of Europe. But legal and 
judicial imperfections of other kinds are abundant; and, in 
England especially, are a large abatement from the value of 
the services which the government renders back to the 
people in return for our enormous taxation. In the first 
place, the incognoscibility (as Bentham termed it) of the 
law, and its extreme uncertainty, even to those who best 
know it, render a resort to the tribunals often necessary for 
obtaining justice, when, there being no dispute as to facts, 
no litigation ought to be required. In the next place, the 
procedure of the tribunals is so replete with delay, vexation, 
and expense, that the price at which justice is at last obtained 
is an evil outweighing a very considerable amount of injust- 
ice ; and the wrong side, even that which the law considers 
such, has many chances of gaining its point, through the 
abandonment of litigation by the other party for want of 
funds, or through a compromise in which a sacrifice is made 
of just rights to terminate the suit, or through some technical 
quirk, whereby a decision is obtained on some other ground 
than the merits. This last detestable incident often happens 
without blame to the judge, under a system of law, of which 
a great part rests on no rational principles adapted to the 
present state of society, but was originally founded partly on 
a kind of whims and conceits, and partly on the principles 
and incidents of feudal tenure, (which now survive only as 
legal fictions ;) and has only been very imperfectly adapted, 
as cases arose, to the changes which had taken place in society. 
Of all parts of the English legal system, the Court of Chan- 
cery, which has the best substantive law, has hitherto been 
incomparably the worst as to delay, vexation, and expense ; 
and this is the only tribunal for most of the classes of cases 
which are in their nature the most complicated, such as cases 
of partnership, and the great range and variety of cases which 
come under the denomination of trust. The recent reforms 
in this Court have abated the mischief, but are still far from 
having removed it. 



ORDINARY FUNCTIONS OF GOVERNMENT. 495 

Fortunately for the prosperity of England, the greater 
part of the mercantile law is comparatively modern, and 
was made by the tribunals, by the simple process of recog- 
nising and giving force of law to the usages which, from 
motives of convenience, had grown up among merchants 
themselves : so that this part of the law, at least, was sub- 
stantially made by those who were- most interested in its 
goodness : while the defects of the tribunals have been the 
less practically pernicious in reference to commercial trans- 
actions, because the importance of credit, which depends on 
character, renders the restraints of opinion (though, as daily 
experience proves, an insufficient) yet a very powerful, pro* 
tection against those forms of mercantile dishonesty which 
are generally recognised as such. 

The imperfections of the law, both in its substance and 
in its procedure, fall heaviest upon the interests connected 
with what is technically called real property ; in the general 
language of European jurisprudence, immoveable property. 
With respect to all this portion of the wealth of the com- 
munity, the law fails egregiously in the protection which it 
undertakes to provide. It fails, first, by the uncertainty, 
and the maze of technicalities, which mako it impossible for 
any one, at however great an expense, to possess a title to 
land which he can positively know to be unassailable. It 
fails, secondly, in omitting to provide due evidence of trans- 
actions, by a proper registration of legal documents. It 
fails, thirdly, by creating a necessity for operose and expen- 
sive instruments and formalities (independently of fiscal 
burthens) on occasion of the purchase and sale, or even the 
lease or mortgage, of immoveable property. And, fourthly, 
it fails by the intolerable expense and delay of law proceed 
ings, in almost all cases in which real property is concerned. 
There is no doubt that the greatest sufferers by the defects 
of the higher courts of civil law are the landowners. Legal 
expenses, either those of actual litigation, or of the prepara- 
tion of legal instruments, form, I apprehend, no inconsidera- 
ble item in the annual expenditure of most persons of large 



496 B00K V. CHAPTER VIII. §3. 

landed property, and the saleable value of their land is 
greatly impaired, by the difficulty of giving to the buyer 
complete confidence in the title ; independently of the legal 
expenses which accompany the transfer. Yet the land- 
owners, though they have been masters of the legislation of 
England, to say the least since 1683, have never made a 
single move in the direction of law reform, and have been 
strenuous opponents of some of the improvements of which 
they would more particularly reap the benefit ; especially 
that great one of a registration of contracts affecting land, 
which when proposed by a Commission of eminent real 
property lawyers, and introduced into the House of Com- 
mons by Lord Campbell, was so offensive to the general body 
of landlords, and was rejected by so large a majority, as to 
have long discouraged any repetition of the attempt. This 
irrational hostility to improvement, in a case in which their 
own interest would be the most benefited by it, must be 
ascribed to an intense timidity on the subject of their titles? 
generated by the defects of the very law which they refuse 
to alter; and to a conscious ignorance, and incapacity of 
judgment, on all legal subjects, which makes them help- 
lessly defer to the opinion of their professional advisers, 
heedless of the fact that every imperfection of the law, in 
proportion as it is burthensome to them, brings gain to the 
lawyer. 

In so far as the defects of legal arrangements are a mere 
burthen on the landowner, they do not much affect the 
sources of production ; but the uncertainty of the title 
under which land is held, must often act as a great dis- 
couragement to the expenditure of capital in its improve- 
ment ; and the expense of making transfers, operates to 
prevent land from coming into the hands of those who would 
use it to most advantage ; often amounting, in the case of 
small purchases, to more than the price of the land, and 
tantamount, therefore, to a prohibition of the purchase and 
.sale of land in small portions, unless in exceptional circum- 
stances. Such purchases, however, are almost everywhere 



ORDINARY FUNCTIONS OF GOVERNMENT. 497 

extremely desirable, there being hardly any country in 
which landed property is not either too much or too little 
subdivided, requiring either that great estates should be 
broken down, or that small ones should be bought up and 
consolidated. To make land as easily transferable as stock, 
would be one of the greatest economical improvements 
which could be bestowed on a country ; and has been 
shown, again and again, to have no insuperable difficulty 
attending it. 

Besides the excellences or defects that belong to the law 
and judicature of a country as a system of arrangements for 
attaining direct practical ends, much also depends, even in 
an economical point of view, upon the moral influences of 
the law. Enough has been said in a former place,* on the 
degree in which both the industrial and all other combined 
operations of mankind depend for efficiency on their being 
able to rely on one another for probity and fidelity to 
engagements ; from which we see how greatly even the 
economical prosperity of a country is liable to be affected, 
by anything in its institutions by which either integrity 
and trustworthiness, or the contrary qualities, are encour- 
aged. The law everywhere ostensibly favours at least pecu- 
niary honesty and the faith of contracts ; but if it affords 
facilities for evading those obligations, by trick and chican- 
ery, or by the unscrupulous use of riches in instituting un- 
just or resisting just litigation; if there are ways and means 
by which persons may attain the ends of roguery, under the 
apparent sanction of the law ; to that extent the law is 
demoralizing, even in regard to pecuniary integrity. And 
such cases are, unfortunately, frequent under the English sys- 
tem. If, again, the law, by a misplaced indulgence, protects 
idleness or prodigality against their natural consequences, 
or dismisses crime with inadequate penalties, the effect, 
both on the prudential, and on the social virtues, is un- 
favourable. "When the law, by its own dispensations and 
injunctions, establishes injustice between individual and 

* Supra, vol. i. p. 149. 

71 



498 BOOK V. CHAPTER VIH. §3. 

individual ; as all laws do which recognise any form of 
slavery ; as the laws of all countries do, though not all in 
the same degree, in respect to the family relations ; and as 
the laws of many countries do, though in still more unequal 
degrees, as between rich and poor ; the effect on the moral 
sentiments of the people is still more disastrous. But these 
subjects introduce considerations so much larger and deeper 
than those of political economy, that I only advert to them 
in order not to pass wholly unnoticed, things superior in 
importance to those of which I treat. 



CHAPTER IX. 

THE SAME SUBJECT CONTINUED. 

§ 1. Having spoken thus far of the effects produced 
by the excellences or defects of the general system of the 
law, I shall now touch upon those resulting from the special 
character of particular parts of it. As a selection must be 
made, I shall confine myself to a few leading topics. The 
portions of the civil law of a country which are of most 
importance economically (next to those which determine the 
status of the labourer, as slave, serf, or free), are those rela- 
ting to the two subjects of Inheritance and Contract. Of 
the laws relating to contract, none are more important 
economically, than the laws of partnership, and those of 
insolvency. It happens that on all these three points, 
there is just ground for condemning some of the provisions 
of the English law. 

With regard to Inheritance, I have, in an early chapter, 
considered the general principles of the subject, and sug- 
gested what appear to me to be, putting all prejudices apart, 
the best dispositions which the law could adopt. Freedom 
of bequest as the general rule, but limited by two things : 
first, that if they are descendants, who, being unable to 
provide for themselves, would become burthensome to the 
state, the equivalent of whatever the state would accord to 
them should be reserved from the property for their benefit : 
and secondly, that no one person should be permitted to 
acquire by inheritance, more than the amount of a moderate 
independence. In case of intestacy, the whole property 
to escheat to the state : which should be bound to make a 



500 BOOK V. CHAPTER IX. § 1. 

just and reasonable provision for descendants, that is, such 
a provision as the parent or ancestor ought to have made, 
their circumstances, capacities, and mode of bringing up 
being considered. 

The laws of inheritance, however, have probably several 
phases of improvement to go through, before ideas so far 
removed from present modes of thinking will be taken into 
serious consideration : and as, among the recognised modes 
of determining the succession to property, some must be 
better and others worse, it is necessary to consider which of 
them deserves the preference. As an intermediate course, 
therefore, I would recommend the extension to all property, 
of the present English law of inheritance affecting personal 
property (freedom of bequest, and, in case of intestacy, 
equal division) : except that no rights should be acknowl- 
edged in collaterals, and that the property of those who have 
neither descendants nor ascendants, and make no will, 
should escheat to the state. 

The laws of existing nations deviate from these maxims 
in two opposite ways. In England, and in most of the 
countries where the influence of feudality is still felt in the 
laws, one of the objects aimed at in respect to land and 
other immoveable property, is to keep it together in large 
masses : accordingly, in cases of intestacy, it passes, gener- 
ally speaking (for the local custom of a few places is differ- 
ent), exclusively to the eldest son. And though the rule of 
primogeniture is not binding on testators, who in England 
have nominally the power of bequeathing their property as 
they please, any proprietor may so exercise this power as to 
deprive his successors of it, by entailing the property on one 
particular line of his descendants : which, besides preventing 
it from passing by inheritance in any other than the pre- 
scribed manner, is attended with the incidental consequence 
of precluding it from being sold ; since each successive pos- 
sessor, having only a life interest in the property, cannot 
alienate it for a longer period than his own life. In some 
other countries, such as France, the law, on the contrary, 



INHERITANCE. 501 

compels division of inheritances ; not only, in case of 
intestacy, sharing the property, both real and personal, 
equally among all the children, or (if there are no chil- 
dren) among all relatives in the same degree of propin- 
quity ; but also not recognising any power of bequest, or 
recognising it over only a limited portion of the property, the 
remainder being subjected to compulsory equal division. 

Neither of these systems, I apprehend, was introduced, 
or is perhaps maintained, in the countries where it exists, 
from any general considerations of justice, or any foresight 
of economical consequences, but chiefly from political 
motives ; in the one case to keep up large hereditary 
fortunes and a landed aristocracy ; in the other, to break 
these down, and prevent their resurrection. The first 
object, as an aim of national policy, I conceive to be emi- 
nently undesirable : with regard to the second, I have 
pointed out what seems to me a better mode of attaining 
it. The merit, or demerit, however, of either purpose, 
belongs to the general science of politics, not to the limited 
department of that science which is here treated of. Each 
of the two systems is a real and efficient instrument for the 
purpose intended by it; but each, as it appears to me, 
achieves that purpose at the cost of much mischief. 

§ 2. There are two arguments of an economical char- 
acter, which are urged in favour of primogeniture. One is, 
the stimulus applied to the industry and ambition of young- 
er children, by leaving them to be the architects of their 
own fortunes. This argument was put by Dr. Johnson in 
a manner more forcible than complimentary to an hereditary 
aristocracy, when he said, by way of recommendation of 
primogeniture, that it "makes but one fool in a family." 
It is curious that a defender of aristocratic institutions 
should be the person to assert that to inherit such a fortune 
as takes away any necessity for exertion, is generally fatal to 
activity and strength of mind : in the present state of educa- 
tion, however, the proposition, with some allowance for 



502 BOOK V. CHAPTER IX. §2. 

exaggeration, may be admitted to be true. But whatever 
force there is in the argument, counts in favour of limiting 
the eldest, as well as all the other children, to a mere pro- 
vision, and dispensing with even the " one fool " whom Dr 
Johnson was willing to tolerate. If unearned riches are so 
pernicious to the character, one does not see why, in order to 
withhold the poison from the junior members of a family, 
there should be no way but to unite all their separate por- 
tions, and administer them in the largest possible dose 
to one selected victim. It cannot be necessary to inflict this 
great evil on the eldest son, for want of knowing what else 
to do with a large fortune. 

Some writers, however, look upon the effect of primo- 
geniture in stimulating industry, as depending, not so much 
on the poverty of the younger children, as on the contrast 
between that poverty and the riches of the elder ; thinking 
it indispensable to the activity and energy of the hive, that 
there should be a huge drone here and there, to impress the 
working bees with a due sense of the advantages of honey. 
" Their inferiority in point of wealth," says Mr. M'Culloch, 
speaking of the younger children, " and their desire to 
escape from this lower station, and to attain to the same 
level with their elder brothers, inspires them with an energy 
and vigour they could not otherwise feel. But the advantage 
of preserving large estates from being frittered down by a 
scheme of equal division, is not limited to its influence 
over the younger children of their owners. It raises uni- 
versally the standard of competence, and gives new force to 
the springs which set industry in motion. The manner of 
living among the great landlords is that in which every one 
is ambitious of being able to indulge ; and their habits of 
expense, though sometimes injurious to themselves, act as 
powerful incentives to the ingenuity and enterprise of the 
other classes, who never think their fortunes sufficiently 
ample, unless they will enable them to emulate the splendour 
of the richest landlords ; so that the custom of primogeniture 
seems to render all classes more industrious, and to augment 



INHERITANCE. 503 

at the same time, the mass of wealth and the scale of 
enjoyment." * 

The portion of truth, I can hardly say contained in these 
observations, but recalled by them, I apprehend to be, that 
a state of complete equality of fortunes would not be favour- 
able to active exertion for the increase of wealth. Speaking 
of the mass, it is as true of wealth as of most other distinc- 
tions — of talent, knowledge, virtue, — that those who already 
have, or think they have, as much of it as their neighbours, 
will seldom exert themselves to acquire more. But it is not 
therefore necessary that society should provide a set of per- 
sons with large fortunes, to fulfil the social duty of standing 
to be looked at, with envy and admiration, by the aspiring 
poor. The fortunes which people have acquired for them- 
selves, answer the purpose quite as well, indeed much bet- 
ter ; since a person is more powerfully stimulated by the 
example of somebody who has earned a fortune, than by the 
mere sight of somebody who possesses one ; and the former 
is necessarily an example of prudence and frugality as well 
as industry, while the latter much oftener sets an example 
of profuse expense, which spreads, with pernicious effect, to 
the very class on whom the sight of riches is supposed to 
have so beneficial an influence, namely, those whose weak- 
ness of mind, and taste for ostentation, makes " the splen- 
dour of the richest landlords " attract them with the most 
potent spell. In America there are few or no hereditary 
fortunes ; yet industrial energy, and the ardour of accumu- 
lation, are not supposed to be particularly backward in that 
part of the world. When a country has once fairly entered 
into the industrial career, which is the principal occupation 
of the modern, as war was that of the ancient and mediaeval 
world, the desire of acquisition by industry needs no fac- 
titious stimulus : the advantages naturally inherent in riches, 
and the character they assume of a test by which talent and 

* Principles of Political Economy, ed. 1843, p. 264. There is much more 
to the same effect in the more recent treatise by the same author, " On the Suc- 
cession to Property vacant by Death." 



504 B OOK V. CHAPTER IX. §2. 

success in life are habitually measured, are an ample security 
for their being pursued with sufficient intensity and zeal. 
As 1k> the deeper consideration, that the diffusion of wealth, 
and not its concentration, is desirable, and that the more 
wholesome state of society is not that in which immense 
fortunes are possessed by a few and. coveted by all, but that 
in which the greatest possible numbers possess and are con- 
tented with a moderate competency, which all may hope to 
acquire ; I refer to it in this place, only to show, how widely 
separated, on social questions, is the entire mode of thought 
of the defenders of primogeniture, from that which is par- 
tially promulgated in the present treatise. 

The other economical argument in favour of primogeni- 
ture, has special reference to landed property. It is con- 
tended, that the habit of dividing inheritances equally, or 
with an approach to equality, among children, promotes the 
subdivision of land into portions too small to admit of being 
cultivated in an advantageous manner. This argument, 
eternally reproduced, has again and again been refuted by 
English and Continental writers. It proceeds on a suppo- 
sition entirely at variance with that on which all the theorems 
of political economy are grounded. It assumes that mankind 
in general will habitually act in a manner opposed to their 
immediate and obvious pecuniary interest. For the division 
of the inheritance does not necessarily imply division of the 
land ; which may be held in common, as is not unfrequently 
the case in France and Belgium ; or may become the prop- 
erty of one of the coheirs, being charged with the shares of 
the other by the way of mortgage ; or they may sell it 
outright, and divide the proceeds. When the division of the 
land would diminish its productive power, it is the direct 
interest of the heirs to adopt some one of these arrangements. 
Supposing, however, what the argument assumes, that either 
from legal difficulties or from their own stupidity and bar- 
barism, they would not, if left to themselves, obey the dic- 
tates of this obvious interest, but would insist upon cutting 
up the land bodily into equal parcels, with the effect of im- 



INHERITANCE. 505 

poverishing themselves ; this would be an objection to a law 
such as exists in France, of compulsory division, but can be 
no reason why testators should be discouraged from exer- 
cising the right of bequest in general conformity to the rule 
of equality, since it would always be in their power to pro- 
vide that the division of the inheritance should take place 
without dividing the land itself. That the attempts of the 
advocates of primogeniture to make out a case by facts 
against the custom of equal division, are equally abortive, 
has been shown in a former place. In all countries, or parts 
of countries, in which the division of inheritances is accom- 
panied by small holdings, it is because small holdings are the 
general system of the country, even on the estates of the 
great proprietors. 

Unless a strong case of social utility can be made out for 
primogeniture, it stands sufficiently condemned by the gen- 
eral principles of justice ; being a broad distinction in the 
treatment of one person and of another, grounded solely on 
an accident. There is no need, therefore, to make out any 
case of economical evil against primogeniture. Such a case, 
however, and a very strong one, may be made. It is a natu- 
ral effect of primogeniture to make the landlords a needy 
class. The object of the institution, or custom, is to keep 
the land together in large masses, and this it commonly ac- 
complishes ; but the legal proprietor of a large domain is 
not necessarily the bond fide owner of the whole income 
which it yields. It is usually charged, in each generation, 
with provisions for the other children. It is often charged 
still more heavily by the imprudent expenditure of the pro- 
prietor. Great landowners are generally improvident in 
their expenses ; they live up to their incomes when at the 
highest, and if any change of circumstances diminishes their 
resources, some time elapses before they make up their 
minds to retrench. Spendthrifts in other classes are ruined, 
and disappear from society ; but the spendthrift landlord 
usually holds fast to his land, even when he has become a 
mere receiver of its rents for the benefit of creditors. The 



506 BOOK V. CHAPTER IX. §3. 

same desire to keep up the "splendour" of the family, 
which gives rise to the custom of primogeniture, indisposes 
the owner to sell a part in order to set free the remainder ; 
their apparent are therefore habitually greater than their 
real means, and they are under a perpetual temptation to 
proportion their expenditure to the former rather than to 
the latter. From such causes as these, in almost all coun- 
tries of great landowners, the majority of landed estates are 
deeply mortgaged ; and instead of having capital to spare 
for improvements, it requires all the increased value of land, 
caused by the rapid increase of the wealth and population 
of the country, to preserve the class from being impover- 
ished. 

§ 3. To avert this impoverishment, recourse was had to 
the contrivance of entails, whereby the order of succession 
was irrevocably fixed, and each holder, having only a life 
interest, was unable to burthen his successor. The land 
thus passing, free from debt, into the possession of the heir, 
the family could not be ruined by the improvidence of its 
existing representative. The economical evils arising from 
this disposition of property were partly of the same kind, 
partly different, but on the whole greater, than those arising 
from primogeniture alone. The possessor could not now 
ruin his successors, but he could still ruin himself: he was 
not at all more likely than in the former case to have the 
means necessary for improving the property : while, even if 
he had, he was still less likely to employ them for that pur- 
pose, when the benefit was to accrue to a person whom the 
entail made independent of him, while he had probably 
younger children to provide for, in whose favour he could 
not now charge the estate. While thus disabled from being 
himself an improver, neither could he sell the estate to 
somebody who would ; since entail precludes alienation. 
In general he has even been unable to grant leases beyond 
the term of his own life ; " for," says Blackstone, " if such 
leases had been valid, then, under cover of long leases, the 



INHERITANCE. 507 

issue might have been virtually disinherited ; " and it has 
been necessary in Great Britain to relax, by statute, the 
rigour of entails, in order to allow either of long leases, or 
of the execution of improvements at the expense of the 
estate. It may be added that the heir of entail, being 
assured of succeeding to the family property, however unde- 
serving of it, and being aware of this from his earliest years, 
has much more than the ordinary chances of growing up 
idle, dissipated, and profligate. 

In England the power of entail is more limited by law, 
than in Scotland and in most other countries where it exists. 
A landowner can settle his property upon any number of 
persons successively who are living at the time, and upon 
one unborn person, on whose attaining age of twenty-one, 
the entail expires, and the land becomes his absolute prop- 
erty. An estate may in this manner be transmitted 
through a son, or a son and grandson, living when the 
deed is executed, to an unborn child of that grandson. 
It has been maintained that this power of entail is not 
sufficiently extensive to do any mischief: in truth, how- 
ever, it is much larger than it seems. Entails very rarely 
expire ; the first heir of entail, when of age, joins with the 
existing possessor in resettling the estate, so as to prolong 
the entail for a further term. Large properties, therefore, 
are rarely free for any considerable period, from the 
restraints of a strict settlement ; though the mischief is in 
one respect mitigated, since in the renewal of the settle- 
ment for one more generation, the estate is usually charged 
with a pension for younger children. 

In an economical point of view, the best system of landed 
property is that in which land is most completely an object 
of commerce ; passing readily from hand to hand when a 
buyer can be found to whom it is worth while to offer a 
greater sum for the land, than the value of the income 
drawn from it by its existing possessor. This of course 
is not meant of ornamental property, which is a source of 
expense, not profit ; but only of land employed for indus- 



508 BOOK V. CHAPTER IX. §4. 

trial uses, and held for the sake of the income which it 
affords. Whatever facilitates the sale of land, tends to 
make it a more productive instrument for the community 
at large; whatever prevents or restricts its sale, subtracts 
from its usefulness. Now, not only has entail this effect, 
but primogeniture also. The desire to keep land together 
in large masses, from other motives than that of promoting 
its productiveness, often prevents changes and alienations 
which would increase its efficiency as an instrument. 

§ 4. On the other hand, a law which, like the French, 
restricts the power of bequest to a narrow compass, and 
compels the equal division of the whole or the greater part 
of the property among the children, seems to me, though 
on different grounds, also very seriously objectionable. 
The only reason for recognising in the children any claim 
at all to more than a provision, sufficient to launch them 
in life, and enable them to find a livelihood, is grounded on 
the expressed or presumed wish of the parent ; whose claim 
to dispose of what is actually his own, cannot be set aside 
by any pretensions of others to receive what is not theirs. 
To control the rightful owner's liberty of gift, by creating 
in the children a legal right superior to it, is to postpone a 
real claim to an imaginary one. To this great and para- 
mount objection to the law, numerous secondary ones may 
be added. Desirable as it is that the parent should treat 
the children with impartiality, and not make a favourite of 
an eldest son, impartial division is not always synonymous 
with equal division. Some of the children may, without 
fault of their own, be less capable than others of providing 
for themselves : some may, by other means than their own 
exertions, be already provided for : and impartiality may 
therefore require that the rule observed should not be one 
of equality, but of compensation. Even when equality is 
the object, there are sometimes better means of attaining it, 
than the inflexible rules by which law must necessarily pro- 
ceed. If one of the coheirs, being of a quarrelsome, litigious 



PARTNERSHIP. 509 

disposition, stands upon his utmost rights, the law cannot 
make equitable adjustments ; it cannot apportion the pro- 
perty as seems best for the collective interest of all con- 
cerned ; if there are several parcels of land, and the heirs 
cannot agree about their value, the law cannot give a parcel 
to each, but every separate parcel must be either put up to 
sale or divided : if there is a residence, or a park or pleas- 
ure-ground, which would be destroyed, as such, by sub- 
division, it must be sold, perhaps at a great sacrifice both of 
money and of feeling. But what the law could not do, the 
parent could. By means of the liberty of bequest, all these 
points might be determined according to reason and the gene- 
ral interest of the persons concerned ; and the spirit of the 
principle of equal division might be the better observed, be- 
cause the testator was emancipated from its letter. Finally, 
it would not then be necessary, as under the compulsory 
system it is, that the law should interfere authoritatively in 
the concerns of individuals, not only on the occurrence of a 
death, but throughout life, in order to guard against the 
attempts of parents to frustrate the legal claims of their 
heirs, under colour of gifts and other alienations inter vivos. 
In conclusion ; all owners of property should, I conceive, 
have power to dispose by will of every part of it, but not to 
determine the person who should succeed to it after the 
death of all who were living when the will was made. 
Under what restrictions it should be allowable to bequeath 
property to one person for life, with remainder to another 
person already in existence, is a question belonging to 
general legislation, not to political economy. Such settle- 
ments would be no greater hindrance to alienation than any 
case of joint ownership, since the consent of persons actually 
in existence is all that would be necessary for any new 
arrangement respecting the property. 

§ 5. From the subject of Inheritance I now pass to that 
of Contracts, and among these, to the important subject of 
the Laws of Partnership. How much of good or evil 



510 BOOK V. CHAPTER IX. §5. 

depends upon these laws, and how important it is that they 
should be the best possible, is evident to all who recognise 
in the extension of the co-operative principle the great 
economical necessity of modern industry. The progress of 
the productive arts requiring that many sorts of industrial 
occupation should be carried on by larger and larger capi- 
tals, the productive power of industry must suffer by what- 
ever impedes the formation of large capitals through the 
aggregation of smaller ones. Capitals of the requisite mag- 
nitude, belonging to single owners, do not, in most countries, 
exist in the needful abundance, and would be still less 
numerous if the laws favoured the diffusion instead of the 
concentration of property : while it is most undesirable that 
all those improved processes, and those means of efficiency 
and economy in production, which depend on the possession 
of large funds, should be monopolies in the hands of a few 
rich individuals, through the difficulties experienced by 
persons of moderate or small means in associating their 
capital. Finally, I must repeat my conviction, that the 
industrial economy which divides society absolutely into two 
portions, the payers of wages and the receivers of them, the 
first counted by thousands and the last by millions, is 
neither fit for, nor capable of, indefinite duration : and the 
possibility of changing this system for one of combina- 
tion without dependence, and unity of interest instead of 
organized hostility, depends altogether upon the future 
developments of the Partnership principle. 

Yet there is scarcely any country whose laws do not 
throw great, and in most cases, intentional obstacles in the 
way of the formation of any numerous partnership. In 
England it is already a serious discouragement, that differ- 
ences among partners are, practically speaking, only capable 
of adjudication by the Court of Chancery : which is often 
worse than placing such questions out of the pale of all law ; 
since any one of the disputant parties, who is either dis- 
honest or litigious, can involve the others at his pleasure 
in the expense, trouble, and anxiety, which are the una void- 



PARTNERSHIP. 511 

able accompaniments of a Chancery suit, without their 
having the power of freeing themselves from the infliction 
even by breaking up the association.* Besides this, it 
required, until lately, a separate act of the legislature before 
any joint-stock association could legally constitute itself, 
and be empowered to act as one body. By a statute passed 
a few years ago, this necessity is done away ; but the statute 
in question is described by competent authorities as a " mass 
of confusion," of which they say that there " never was such 
an infliction " on persons entering into partnership.f When 
a number of persons, whether few or many, freely desire to 
unite their funds for a common undertaking, not asking any 
peculiar privilege, nor the power to dispossess any one of 
property, the law can have no good reason for throwing 
difficulties in the way of the realization of the project. On 
compliance with a few simple conditions of publicity, any 
body of persons ought to have the power of constituting 
themselves into a joint-stock company, or societe en nom 
collectif, without asking leave either of any public officer or 
of parliament. As an association of many partners must 

* Mr. Cecil Fane, the Commissioner of the Bankruptcy Court, in his evidence 
before the Committee on the Law of Partnership, says: "I remember a short 
time ago reading a written statement by two eminent solicitors, who said that 
they had known many partnership accounts go into Chancery, but that they 
never knew one come out. . . . Very few of the persons who would be dis- 
posed to engage in partnerships of this kind " (co-operative associations of work- 
ing men) " have any idea of the truth, namely, that the decision of questions 
arising amongst partners is really impracticable. 

" Do they not know that one partner may rob the other without any possi- 
bility of his obtaining redress ? — The fact is so ; but whether they know it or 
not, I cannot undertake to say." 

This flagrant injustice is, in Mr. Fane's opinion, wholly attributable to the 
defects of the tribunal. " My opinion is, that if there is one thing more easy 
than another, it is the settlement of partnership questions, and for the simple 
reason, that everything which is done in a partnership is entered in the books ; 
the evidence therefore is at hand ; if therefore a rational mode of proceeding 
were once adopted, the difficulty would altogether vanish." — Minutes of Evidence 
annexed to the Report of the Select Committee on the Law of Partnership 
(1851), pp. 85-7. 

f Report, ut supra, p. 167. 



512 BOOK V. CHAPTER IX. §6. 

practically be under the management of a few, every facility 
ought to be afforded to the body for exercising the necessary 
control and check over those few, whether they be them- 
selves members of the association, or merely its hired ser- 
vants : and in this point the English system is still at a 
lamentable distance from the standard of perfection. 

§ 6. Whatever facilities, however, English law might 
give to associations formed on the principles of ordinary 
partnership, there is one sort of joint-stock association which 
until the year 1855 it absolutely disallowed, and which, 
could only be called into existence by a special act either 
of the legislature or of the crown. I mean, associations 
with limited liability. 

Associations with limited liability are of two kinds : in 
one, the liability of all the partners is limited, in the other that 
of some of them only. The first is the societe anonyme of 
the French law, which in England had until lately no other 
name than that of " chartered company :" meaning thereby 
a joint-stock company whose shareholders, by a charter from 
the crown or a special enactment of the legislature, stood 
exempted from any liability for the debts of the concern, 
beyond the amount of their subscriptions. The other species 
of limited partnership is that known to the French law 
under the name of commandite y of this, which in England 
is still unrecognised and illegal, I shall speak presently. 

If a number of persons choose to associate for carrying 
on any operation of commerce or industry, agreeing among 
themselves and announcing to those with whom they deal 
that the members of the association do not undertake to be 
responsible beyond the amount of the subscribed capital ; is 
there any reason that the law should raise objections to this 
proceeding, and should impose on them the unlimited 
responsibility which they disclaim ? For whose sake ? Not 
for that of the partners themselves ; for it is they whom 
the limitation of responsibility benefits and protects. It 
must therefore be for the sake of third parties ; namely, 



PARTNERSHIP. 513 

those who may have transactions with the association, and 
to whom it may run in debt beyond what the subscribed 
capital suffices to pay. But nobody is obliged to deal with 
the association ; still less is any one obliged to give it un- 
limited credit. The class of persons with whom such asso- 
ciations have dealings are in general perfectly capable of 
taking care of themselves, and there seems no reason that 
the law should be more careful of their interests than they 
will themselves be ; provided no false representation is held 
out, and they are aware from the first what they have trust to. 
The law is warranted in requiring from all joint-stock asso- 
ciations with limited responsibility, not only that the amount 
of capital on which they profess to carry on business should 
either be actually paid up or security given for it (if, in- 
deed, with complete publicity, such a requirement would 
be necessary) but also that such accounts should be kept, ac- 
cessible to individuals, and if needful, published to the world, 
as shall render it possible to ascertain at any time the existing 
state of the company's affairs, and to learn whether the cap- 
ital which is the sole security for the engagements into which 
they enter, still subsist unimpaired : the fidelity of such ac- 
counts being guarded by sufficient penalties. When the law 
has thus afforded to individuals all practicable means of know- 
ing the circumstances which ought to enter into their pru- 
dential calculations in dealing with the company, there 
seems no more need for interfering with individual judgment 
in this sort of transactions, than in any other part of the 
private business of life. 

The reason usually urged for such interference is, that 
the managers of an association with limited responsibility, 
not risking their whole fortunes in the event of loss, while 
in case of gain they might profit largely, are not sufficiently 
interested in exercising due circumspection, and are under 
the temptation of exposing the funds of the association to 
improper hazards. It is, however, well ascertained that 
associations with unlimited responsibility, if they have rich 
shareholders, can obtain, even when known to be reckless 
72 



514 BOOK V. CHAPTER IX. §6. 

in their transactions, improper credit to an extent far exceed- 
ing what would be given to companies equally ill-conducted 
whose creditors had only the subscribed capital to rely on.* 
To whichever side the balance of evil inclines, it is a con- 
sideration of more importance to the shareholders them- 
selves than to third parties ; since, with proper securities 
for publicity, the capital of an association with limited 
liability could not be engaged in hazards beyond those 
ordinarily incident to the business it carries on, without 
the facts being known, and becoming the subject of com- 
ments by which the credit of the body would be likely to 
be affected in quite as great a degree as the circumstances 
would justify. If, under securities for publicity, it were 
found in practice that companies, formed on the principle 
of unlimited responsibility, were more skilfully and more 
cautiously managed, companies with limited liability would 
be unable to maintain an equal competition with them ; 
and would therefore rarely be formed, unless when such 
limitation was the only condition on which the necessary 
amount of capital could be raised : and in that case it 
would be very unreasonable to say that their formation 
ought to be prevented. 

It may further be remarked, that although, with equality 
of capital, a company of limited liability offers a somewhat 
less security to those who deal with it, than one in which 
every shareholder is responsible with his whole fortune, yet 
even the weaker of these two securities is in some respects 
stronger than that which an individual capitalist can afford. 
In the case of an individual, there is such security as can 
be founded on his unlimited liability, but not that derived 
from publicity of transactions, or from a known and large 
amount of paid-up capital. This topic is well treated in an 
able paper by M. Coquelin, published in the Eevue des 
Deux Mondes for July 1843.f 

* See the Report already referred to, pp. 145-158. 

f The quotation is from a translation published by Mr. H. C. Carey, in an 
American periodical, Hunt's Merchant's Magazine, for May and June 1 845. 



PARTNERSHIP. 515 

" While tliird parties who trade with individuals," says 
this writer, " scarcely ever know, except by approximation, 
and even that most vague and uncertain, what is the amount 
of capital responsible for the performance of contracts made 
with them, those who trade with a societe anonyme can 
obtain full information if they seek it, and perform their 
operations with a feeling of confidence that cannot exist in 
the other case. Again, nothing is easier than for an indi- 
vidual trader to conceal the extent of his engagements, as 
no one can know it certainly but himself. Even his confi- 
dential clerk may be ignorant of it, as the loans he finds 
himself compelled to make may not all be of a character to 
require that they be entered in his day-book. It is a secret 
confined to himself ; one which transpires rarely, and always 
slowly ; one which is unveiled only when the catastrophe has 
occurred. On the contrary, the societe anonyme neither 
can nor ought to borrow, without the fact becoming known 
to all the world — directors, clerks, shareholders, and the 
public. Its operations partake in some respects, of the 
nature of those of governments. The light of day penetrates 
in every direction, and there can be no secrets from those 
who seek for information. Thus all is fixed, recorded, 
known, of the capital and debts in the case of the societe 
anonyme, while all is uncertain and unknown in the case of 
the individual trader. Which of the two, we would ask the 
reader, presents the most favourable aspect, or the surest 
guarantee, to the view of those who trade with them ? 

" Again, availing himself of the obscurity in which his 
affairs are shrouded, and which he desires to increase, the 
private trader is enabled, as long as his business appears 
prosperous, to produce impressions in regard to his means 
far exceeding the reality, and thus to establish a credit not 
justified by those means. When losses occur, and he sees 
himself threatened with bankruptcy, the world is still igno- 
rant of his condition, and he finds himself enabled to contract 
debts far beyond the possibility of payment. The fatal day 
arrives, and the creditors find a debt much greater than had 



516 BOOK V. CHAPTER IX. §Y. 

been anticipated, while the means of payment are as much 
less. Even this is not all. The same obscurity which has 
served him so well thus far, when desiring to magnify his 
capital and increase his credit, now affords him the oppor- 
tunity of placing a part of that capital beyond the reach of 
his creditors. It becomes diminished, if not annihilated. 
It hides itself, and not even legal remedies, nor the activity 
of creditors, can bring it forth from the dark corners in 
which it is placed. . . . Our readers can readily deter- 
mine for themselves if practices of this kind are equally 
easy in the case of the societe anonyme. We do not doubt 
that such things are possible, but we think that they will 
agree with us that from its nature, its organization, and the 
necessary publicity that attends all its actions, the liability 
to such occurrences is very greatly diminished." 

The laws of most countries, England included, have 
erred in a twofold manner with regard to joint-stock com- 
panies. While they have been most unreasonably jealous 
of allowing such associations to exist, especially with limited 
responsibility, they have generally neglected the enforcement 
of publicity ; the best security to the public against any 
danger which might arise from this description of partner- 
ships ; and a security quite as much required in the case of 
those associations of the kind in question, which, by an 
exception from their general practice, they suffered to exist. 
Even in the instance of the Bank of England, which holds a 
monopoly from the legislature, and has had partial control 
over a matter of so much public interest as the state of the 
circulating medium, it is only within these few years 
that any publicity has been enforced ; and the publicity was 
at first of an extremely incomplete character, though now, 
for most practical purposes, probably at length sufficient. 

§ 7. The other kind of limited partnership which de- 
mands our attention, is that in which the managing partner 
or partners are responsible with their whole fortunes for the 
engagements of the concern, but have others associated with 



PARTNERSHIP. 517 

them who contribute only definite sums, and are not liable 
for anything beyond, though they participate in the profits 
according to any rule which may be agreed on. This 
is called partnership en commandite : and the partners 
with limited liability (to whom, by the French law, all 
interference in the management of the concern is interdicted) 
are known by the name commanditaires. Such partner- 
ships are not allowed by English law : whoever shares in 
the profits is liable for the debts, to as plenary an extent as 
the managing partner. 

For such prohibition no satisfactory defence has ever, 
so far as I am aware, been made. Even the insufficient 
reason given against limiting the responsibility of share- 
holders in a joint-stock company, does not apply here ; 
there being no diminution of the motives to circumspect 
management, since all who take any part in the direction 
of the concern are liable with their whole fortunes. To 
third parties, again, the security is improved by the exist- 
ence of commandite ; since the amount subscribed by com- 
manditaires is all of it available to creditors, the comman- 
ditaires losing their whole investment before any creditor 
can lose anything ; while, if instead of becoming partners 
to that amount, they had lent the sum at an interest equal 
to the profit they derived from it, they would have shared 
with the other creditors in the residue of the estate, dimin- 
ishing pro rata the dividend obtained by all. While the 
practice of commandite thus conduces to the interest of 
creditors, it is often highly desirable for the contracting 
parties themselves. The managers are enabled to obtain the 
aid of a much greater amount of capital than they could 
borrow on their own security ; and persons are induced to 
aid useful undertakings, by embarking limited portions of 
capital in them when they would not, and often could not 
prudently, have risked their whole fortunes on the chances 
of the enterprise. 

It may perhaps be thought that where due facilities are 
afforded to joint-stock companies, commandite partnerships 



518 , BOOK V. CHAPTER IX. §7. 



rich 



are not required. But there are classes of cases to whie 
the commandite principle must always be better adapted 
than the joint-stock principle. " Suppose," says M. Coque- 
lin, " an inventor seeking for a capital to carry his invention 
into practice. To obtain the aid of capitalists, he must 
offer them a share of the anticipated benefit ; they must 
associate themselves with him in the chances of its success. 
In such a case, which of the forms would he select ? Not 
a common partnership, certainly ;" for various reasons, and 
especially the extreme difficulty of finding a partner with 
capital, willing to risk his whole fortune on the success of the 
invention.* " Neither would he select the societe anonyme" 
or any other form of joint-stock company, " in which he might 
be superseded as manager. He would stand, in such an asso- 
ciation, on no better footing than any other shareholder, 
and he might be lost in the crowd ; whereas, the association 
existing, as it were, by and for him, the management would 
appear to belong to him as a matter of right. Cases occur 

* " There has been a great deal of commiseration professed," says Mr. Dun- 
can, solicitor, " towards the poor inventor ; he has been oppressed by the high 
cost of patents ; but his chief oppression has been the partnership law, which 
prevents his getting any one to help him to develop his invention. He is a 
poor man, and therefore cannot give security to a creditor ; no one will lend 
him money ; the rate of interest offered, however high it may be, is not an 
attraction. But if by the alteration of the law he could allow capitalists to take 
an interest with him and share the profits, while the risk should be confined to 
the capital they embarked, there is very little doubt at all that he would fre- 
quently get assistance from capitalists ; whereas at the present moment, with 
the law as it stands, he is completely destroyed, and his invention is useless to 
him ; he struggles month after month ; he applies again and again to the capi- 
talist without avail. I know it practically in two or three cases of patented in- 
ventions ; especially one where parties with capital were desirous of entering 
into an undertaking of great moment in Liverpool, but five or six different gen- 
tlemen were deterred from doing so, all feeling the strongest objection to what 
each one called the cursed partnership law." Report, p. 155. 

Mr. Fane says, " In the course of my professional life, as a Commissioner of 
the Court of Bankruptcy, I have learned that the most unfortunate man in the 
world is an inventor. The difficulty which an inventor finds in getting at capi- 
tal, involves him in all sorts of embarrassments, and he ultimately is for the 
most part a ruined man, and somebody else gets possession of his invention." 
lb. p. 82. 



PARTNERSHIP. 519 

in which a merchant or a manufacturer, without being pre- 
cisely an inventor, has undeniable claims to the manage- 
ment of an undertaking, from the possession of qualities 
peculiarly calculated to promote its success. So great, 
indeed," continues M. Coquelin, " is the necessity, in 
many cases, for the limited partnership, that it is difficult 
to conceive how we could dispense with or replace it : " 
and in reference to his own country he is probably in the 
right. 

"Where there is so great a readiness as in England, on 
the part of the public, to form joint-stock associations, even 
without the encouragement of a limitation of responsi- 
bility ; commandite partnership, though its prohibition is 
in principle quite indefensible, cannot be deemed to be, in a 
merely economical point of view, of the imperative necessity 
which M. Coquelin ascribes to it. Yet the inconveniences 
are not small, which arise indirectly from those provi- 
sions of the law by which every one who shares in the 
profits of a concern is subject to the full liabilities of an 
unlimited partnership. It is impossible to say how many 
or what useful modes of combination are rendered im- 
practicable by this state of the law. It is sufficient for 
its condemnation that, unless in some way relaxed, it is 
inconsistent with the payment of wages in part by a per- 
centage on profits ; in other words, the association of the 
operatives as virtual partners with the capitalist. 

It is, above all, with reference to the improvement and 
elevation of the working classes that complete freedom in 
the conditions of partnership is indispensable. Combina- 
tions such as the associations of workpeople, described in a 
former chapter, are the most powerful means of effecting 
the social emancipation of the labourers through their own 
moral qualities. Nor is the liberty of association important 
solely for its examples of success, but fully as much so for 
the sake of attempts which would not succeed ; but by their 
failure would give instruction more impressive than can be 
afforded by anything short of actual experience. Every 



520 B00K v - CHAPTER IX. §Y. 

theory of social improvement, the worth of which is capable 
of being brought to an experimental test, should be per- 
mitted, and even encouraged, to submit itself to that test. 
From such experiments the active portion of the working 
classes would derive lessons which they would be slow to 
learn from the teaching of persons supposed to have interests 
and prejudices adverse to their good ; would obtain the 
means of correcting at no cost to society, what is now erro- 
neous in their notions of the means of establishing their 
independence ; and of discovering the conditions, moral, 
intellectual, and industrial, which are indispensably neces- 
sary for effecting without injustice, or for effecting at all, 
the social regeneration they aspire to.* 

The French law of partnership is superior to the English 
in permitting commandite ; and superior, in having no such 
unmanageable instrument as the Court of Chancery, all cases 
arising from commercial transactions being adjudicated in a 
comparatively cheap and expeditious manner by a tribunal 
of merchants. In other respects the French system is far 
worse than the English. A joint-stock company with limit- 
ed responsibility cannot be formed without the express au- 
thorization of the department of government called the 
Conseil cPEtat, a body of administrators, generally entire 
strangers to industrial transactions, who have no interest in 
promoting enterprises, and are apt to think that the purpose 
of their institution is to restrain them ; whose consent cannot 
in any case be obtained without an amount of time and 
labour which is a very serious hindrance to the commence- 
ment of an enterprise, while the extreme uncertainty of 

* By an act of the year 1852, called the Industrial and Provident Societies 
Act, for which the nation is indebted to the public-spirited exertions of Mr. 
Slaney, industrial associations of working people are admitted to the statutory 
privileges of Friendly Societies. This not only exempts them from the formali- 
ties applicable to joint-stock companies, but provides for the settlement of dis- 
putes among the partners without recourse to the Court of Chancery. There are 
still some defects in the provisions of this Act, which hamper the proceedings of 
the Societies in several respects ; as is pointed out in the Almanack of the Roch- 
dale Equitable Pioneers for 1861. 



PARTNERSHIP. 521 

obtaining that consent at all is a great discouragement to 
capitalists who would be willing to subscribe. In regard to 
joint-stock companies without limitation of responsibility, 
which in England exist in such numbers and are formed 
with such facility, these associations cannot, in France, exist 
at all ; for, in cases of unlimited partnership, the French 
law does not permit the division of the capital into trans- 
ferable sjiares. 

The best existing laws of partnership appear to be those 
of the New England States. According to Mr. Carey,* 
" nowhere is association so little trammelled by regulations 
as in New England ; the consequence of which is, that it i? 
carried to a greater extent there, and particularly in Massa- 
chusetts and Rhode Island, than in any other part of the 
world. In these states, the soil is covered with compagnics 
anonym.es — chartered companies — for almost every conceiv- 
able purpose. Every town is a corporation for the manage- 
ment of its roads, bridges, and schools ; which are, therefore, 
under the direct control of those who pay for them, and are 
consequently well managed. Academies and churches, ly- 
ceums and libraries, saving-fund societies, and trust com- 
panies, exist in numbers proportioned to the wants of the 
people, and all are corporations. Every district has its 
local bank, of a size to suit its wants, the stock of which is 
owned by the small capitalists of the neighborhood, and 
managed by themselves ; the consequence of which is, that 
in no part of the world is the system of banking so perfect 
— so little liable to vibration in the amount of loans — the 
necessary effect of which is, that in none is the value of prop- 
erty so little affected by changes in the amount or value 
of the currency resulting from the movements of their own 
banking institutions. In the two states to which we have 
particularly referred, they are almost two hundred in num- 
ber. Massachusetts, alone, offers to our view fifty-three 
insurance offices, of various forms, scattered through the 
state, and all incorporated. Factories are incorporated, and 

* In a note appended to his translation of M. Coquelin's paper. 



522 BOOK V. CHAPTER IX. §7. 

are owned in shares ; and every one that has any part in 
the management of their concerns, from the purchase of the 
raw material to the sale of the manufactured article, is a 
part owner ; while every one employed in them has a pros- 
pect of becoming one, by the use of prudence, exertion, 
and economy. Charitable associations exist in large num- 
bers, and all are incorporated. Fishing vessels are owned in 
shares by those who navigate them ; and the sailors of a 
whaling ship depend in a great degree, if not altogether, 
upon the success of the voyage for their compensation. 
Every master of a vessel trading in the Southern Ocean is a 
part owner, and the interest he possesses is a strong induce- 
ment to exertion and economy, by aid of which the people 
of New England are rapidly driving out the competition 
of other nations for the trade of that part of the world. 
"Wherever settled, they exhibit the same tendency to com- 
bination of action. In New York they are the chief owners 
of the lines of packet ships, which are divided into shares, 
owned by the shipbuilders, the merchants, the master, and 
the mates ; which last generally acquire the means of be- 
coming themselves masters, and to this is due their great 
success. The system is the most perfectly democratic of any 
in the world. It affords to every labourer, every sailor, 
every operative, male or female, the prospect of advance- 
ment ; and its results are precisely such as we should have 
reason to expect. In no part of the world are talent, 
industry, and prudence, so certain to be largely rewarded." 
The cases of insolvency and fraud on the part of char- 
tered companies in America, which have caused so much 
loss and so much scandal in Europe, did not occur in the 
part of the Union to which this extract refers, but in the 
other States, in which the right of association is much more 
fettered by legal restrictions, and in which, accordingly, 
joint-stock associations are not comparable in number or 
variety to those of New England. Mr. Carey adds, " A 
careful examination of the systems of the several states, can 
scarcely, we think, fail to convince the reader of the advan- 



INSOLVENCY. 523 

tage resulting from permitting men to determine among 
themselves the terms upon which they will associate, and 
allowing the associations that may be formed to contract 
with the public as to the terms npon which they will trade 
together, whether of the limited or unlimited liability of the 
partners ;" and I concur in thinking that to this conclusion, 
science and legislation must come. 

§ 8. I proceed to the subject of Insolvency Laws. 

Good laws on this subject are important, first and prin- 
cipally, on the score of public morals ; which are on no 
point more under the influence of the law, for good and 
evil, than in a matter belonging so pre-eminently to the 
province of law as the preservation of pecuniary integrity. 
But the subject is also, in a merely economical point of view, 
of great importance. First, because the economical well- 
being of a people, and of mankind, depends in an especial 
manner upon their being able to trust each other's engage- 
ments. Secondly, because one of the risks, or expenses, of 
industrial operations is the risk or expense of what are com- 
monly called bad debts, and every saving which can be 
effected in this liability is a diminution of cost of produc- 
tion ; by dispensing with an item of outlay which in no way 
conduces to the desired end, and which must be paid for 
either by the consumer of the commodity, or from the 
general profits of capital, according as the burden is pecu- 
liar or general. 

The laws and practice of nations on this subject have 
almost always been in extremes. The ancient laws of most 
countries were all severity to the debtor. They invested the 
creditor with a power of coercion, more or less tyrannical, 
which he might use against his insolvent debtor, either to 
extort the surrender of hidden property, or to obtain satis- 
faction of a vindictive character, which might console him 
for the non-payment of the debt. This arbitrary power has 
extended, in some countries, to making the insolvent debtor 
serve the creditor as his slave : in which plan there were at 



524 BOOK V. CHAPTER IX. §8. 

least some grains of common sense, since it might possibly 
be regarded as a scheme for making him work out the debt 
by his labour. In England, the coercion assumed the milder 
form of ordinary imprisonment. The one and the other 
were the barbarous expedients of a rude age, repugnant to 
justice as well as to humanity. Unfortunately the reform 
of them, like that of the criminal law generally, has been 
taken in hand as an affair of humanity only, not of justice : 
and the modish humanity of the present time, which is essen- 
tially a thing of one idea, has in this as in other cases gone 
into violent reaction against the ancient severity, and might 
almost be supposed to see, in the fact of having lost or 
squandered other people's property, a peculiar title to 
indulgence. Everything in the law which attached disagree- 
able consequences to that fact, was gradually relaxed, or 
entirely got rid of: until the demoralizing effects of this 
laxity became so evident as to determine, by more recent 
legislation, a salutary though very insufficient movement in 
the reverse direction. 

The indulgence of the laws to those who have made them- 
selves unable to pay their just debts, is usually defended, on 
the plea that the sole object of the law should be, in case of 
insolvency, not to coerce the person of the debtor, but to 
get at his property, and distribute it fairly among the credi- 
tors. Assuming that this is and ought to be the sole object, 
the mitigation of the law was in the first instance carried so 
far as to sacrifice that object. Imprisonment at the discretion 
of a creditor was really a powerful engine for extracting from 
the debtor any property which he had concealed or other- 
wise made away with : and it remains to be shown by 
experience whether, in depriving creditors of this instru- 
ment, the law, even as last amended, has furnished them 
with a sufficient equivalent. But the doctrine that the law 
has done all that ought to be expected from it, when it has 
put the creditors in possession of the property of an insol- 
vent, is in itself a totally inadmissible piece of spurious 
humanity. It is the business of law to prevent wrong- 



INSOLVENCY. 525 

doing, and not simply to patch up the consequences of it 
when it has been committed. The law is bound to take care 
that insolvency shall not be a good pecuniary speculation ; that 
men shall not have the privilege of hazarding other people's 
property without their knowledge or consent, taking the 
profits of the enterprise if it is successful, and if it fails, 
throwing the loss upon the rightful owners ; and that they 
shall not find it answer to make themselves unable to pay 
their just debts, by spending the money of their creditors in 
personal indulgence. It is admitted that what is technically 
called fraudulent bankruptcy, the false pretence of inability 
to pay, is, when detected, properly subject to punishment. 
But does it follow that insolvency is not the consequence of 
misconduct because the inability to pay may be real ? If a 
man has been a spendthrift, or a gambler, with property on 
which his creditors had a prior claim, shall he pass scot-free 
because the mischief is consummated and the money gone ? 
Is there any very material difference in point of morality 
between this conduct, and those other kinds of dishonesty 
which go by the names of fraud and embezzlement ? 

Such cases are not a minority, but a large majority among 
insolvencies. The statistics of bankruptcy prove the fact. 
" By far the greater part of all insolvencies arise from noto- 
rious misconduct ; the proceedings of the Insolvent Debtors 
Court and of the Bankruptcy Court will prove it. Excessive 
and unjustifiable overtrading, or most absurd speculation in 
commodities, merely because the poor speculator ' thought 
they would get up,' but why he thought so he cannot tell ; 
speculations in hops, in tea, in silk, in corn — things with 
which he is altogether unacquainted ; wild and absurd in- 
vestments in foreign funds, or in joint-stocks ; these are 
among the most innocent causes of bankruptcy." * The ex- 
perienced and intelligent writer from whom I quote, corrob- 
orates his assertion by the testimony of several of the official 
assignees of the Bankruptcy Court. One of them says, "As 

* From a volume published in 1845, entitled, "Credit the Life of Com- 
merce," by Mr. J. H. Elliott. 



526 B00K v - CHAPTER IX. §8. 

far as I can collect from the books and documents furnished 
by the bankrupts, it seems to me that " in the whole number 
of cases which occurred during a given time in the court to 
which he was attached, " fourteen have been ruined by spec- 
ulations in things with which they were unacquainted ; three 
by neglecting book-keeping; ten by trading beyond their 
capital and means, and the consequent loss and expense of 
accommodation-bills ; forty-nine by expending more than 
they could reasonably hope their profits would be, though 
their business yielded a fair return ; none by any general 
distress, or the falling off of any particular branch of trade." 
Another of these officers says that, during a period of eighteen 
months, " fifty-two cases of bankruptcy have come under my 
care. It is my opinion that thirty-two of these have arisen 
from an imprudent expenditure, and five partly from that 
cause, and partly from a pressure on the business in which 
the bankrupts were employed. Fifteen I attribute to im- 
provident speculations, combined in many instances with an 
extravagant mode of life." 

To these citations the author adds the following state- 
ments from his personal means of knowledge. "Many 
insolvencies are produced by tradesmen's indolence ; they 
keep no books, or at least imperfect ones, which they never 
balance ; they never take stock ; they employ servants, if 
their trade be extensive, whom they are too indolent even to 
supervise, and then become insolvent. It is not too much to 
say, that one-half of all the persons engaged in trade, even 
in London, never take stock at all : they go on year after 
year without knowing how their affairs stand, and at last 
like the child at school, they find to their surprise, but one 
halfpenny left in their pocket. I will venture to say that 
not one-fourth of all the persons in the provinces, either 
manufacturers, tradesmen, or farmers, ever take stock ; nor 
in fact do one-half of them ever keep account-books, 
deserving any other name than memorandum books. I 
know sufficient of the concerns of five hundred small trades- 
men in the provinces, to be enabled to say, that not one- 



INSOLVENCY. 527 

fifth of them ever take stock, or keep even the most ordinary- 
accounts. I am prepared to say of such tradesmen, from 
carefully-prepared tables, giving every advantage where 
there has been any doubt as to the causes of their i»sol- 
vency, that where nine happen from extravagance or 
dishonesty, one " at most " may be referred to misfortune 
alone." * 

Is it rational to expect among the trading classes any 
high sense of justice, honour, or integrity, if the law enables 
men who act in this manner to shuffle off the consequences 
of their misconduct upon those who have been so unfortunate 
as to trust them ; and practically proclaims that it looks 
upon insolvency thus produced, as a " misfortune," not an 
offence ? 

It is, of course, not denied, that insolvencies do arise 
from causes beyond the control of the debtor, and that, in 
many more cases, his culpability is not of a high order ; and 
the law ought to make a distinction in favour of such cases, 
but not without a searching investigation ; nor should the 
case ever be let go without having ascertained, in the most 
complete manner practicable, not the fact of insolvency only, 
but the cause of it. To have been trusted with money or 
money's worth, and to have lost or spent it, is prima facie 
evidence of something wrong : and it is not for the creditor to 
prove, which he cannot do in one case out of ten, that there 
has been criminality, but for the debtor to rebut the pre- 
sumption, by laying open the whole state of his affairs, and 
showing either that there has been no misconduct or that the 
misconduct has been of an excusable kind. If he fail in this, 
he ought never to be dismissed without a punishment propor- 
tioned to the degree of blame which seems justly imputable 
to him ; which punishment, however, might be shortened or 
mitigated in proportion as he appeared likely to exert him- 
self in repairing the injury done. 

It is a common argument with those who approve a re- 
laxed system of insolvency laws, that credit, except in the 

* Pp. 50-1. 



528 BOOK v - CHAPTER IX. §8. 

great operations of commerce, is an evil ; and that to deprive 
creditors of legal redress is a judicious means of preventing 
credit from being given. That which is given by retail 
dealers to unproductive consumers is, no doubt, to the excess 
to which it is carried, a considerable evil. This, however, 
is only true of large, and especially of long, credits ; for 
there is credit whenever goods are not paid for before they 
quit the shop, or, at least, the custody of the seller ; and 
there would be much inconvenience in putting an end to 
this sort of credit. But a large proportion of the debts on 
which insolvency laws take effect, are those due by small 
tradesmen to the dealers who supply them : and on no class 
of debts does the demoralization occasioned by a bad state 
of the law, operate more perniciously. These are commer- 
cial credits, which no one wishes to see curtailed ; their ex- 
istence is of great importance to the general industry of the 
country, and to numbers of honest, well-conducted persons 
of small means, to whom it would be a great injury that 
they should be prevented from obtaining the accommodation 
they need, and would not abuse, through the omission of the 
law to provide just remedies against dishonest or reckless 
borrowers. 

But though it were granted that retail transactions, on 
any footing but that of ready money payment, are an evil, 
and their entire suppression a fit object for legislation to aim 
at ; a worse mode of compassing that object could scarcely 
be invented, than to permit those who have been trusted by 
others to cheat and rob them with impunity. The law does 
not generally select the vices of mankind as the appropriate 
instrument for inflicting chastisement on the comparatively 
innocent : when it seeks to discourage any course of action, 
it does so by applying inducements of its own, not by out- 
lawing those who act in the manner it deems objectionable, 
and letting loose the predatory instincts of the worthless part 
of mankind to feed upon them. If a man has committed 
murder, the law condemns him to death ; but it does not 
promise impunity to anybody who may kill him for the sake 



INSOLVENCY. 529 

of taking his purse. The offence of believing another's word, 
even rashly, is not so heinous that, for the sake of discoura- 
ging it, the spectacle should he brought home to every door, 
of triumphant rascality, with the law on its side, mocking 
the victims it has made. This pestilent example has been 
very widely exhibited since the relaxation of the insolvency 
laws. It is idle to expect that, even by absolutely depriving 
creditors of all legal redress, the kind of credit which is con- 
sidered objectionable would really be very much checked. 
Rogues and swindlers are still an exception among mankind, 
and people will go on trusting each other's promises. Large 
dealers, in abundant business, would refuse credit, as many 
of them already do : but in the eager competition of a great 
town, what can be expected from the tradesmen to whom a 
single customer is of importance, the beginner, perhaps, who 
is striving to get into business ? He will take the risk, even 
if it were still greater ; he is ruined if he cannot sell his 
goods, and he can but be ruined if he is defrauded. Nor 
does it avail to say, that he ought to make proper inquiries, 
and ascertain the character of those to whom he supplies 
goods on trust. In some of the most flagrant cases of prof- 
ligate debtors which have come before the Bankruptcy Court, 
the swindler had been able to give, and had given excellent 
references.* 



* The following extracts from the French Code de Commerce (the transla- 
tion is that of Mr. Fane), show the great extent to which the just distinctions are 
made, and the proper investigations provided for, by French law. The word 
banquerote, which can only be translated by bankruptcy, is, however, confined 
in France to culpable insolvency, which is distinguished into simple bankruptcy 
and fraudulent bankruptcy. The following are cases of simple bankruptcy : — 

" Every insolvent who, in the investigation of his affairs, shall appear charge- 
able with one or more of the following offences, shall be proceeded against as a 
simple bankrupt. 

" If his house expenses, which he is bound to enter regularly in a day-book, 
appear excessive. 

"If he has spent considerable sums at play, or in operations of pure 
hazard. 

"If it shall appear that he has borrowed largely, or resold merchandise at a 

73 



530 BOOK V. CHAPTER IX. §8. 

loss, or below the current price, after it appeared by his last account-taking that 
his debts exceeded his assets by one-half. 

" If he has issued negotiable securities to three times the amount of his avail- 
able assets, according to his last account-taking. 

" The following may also be proceeded against as simple bankrupts: — 

"tie who has not declared his own insolvency in the manner prescribed by 
law: 

" He who has not come in and surrendered within the time limited, having 
no legitimate excuse for his absence : 

" He who either produces no books at all, or produces such as have been 
irregularly kept, and this although the irregularities may not indicate fraud." 

The penalty for "simple bankruptcy" is imprisonment for a term of not less 
than one month, nor more than two years. The following are cases of fraudu- 
lent bankruptcy, of which the punishment is travaux forces (the galleys), for a 
term: 

"If he has attempted to account for his property by fictitious expenses and 
losses, or if he does not fully account for all his receipts : 

"If he has fraudulently concealed any sum of money or any debt due to 
him, or any merchandise or other moveables : 

" If he has made fraudulent sales or gifts of his property : 

" If he has allowed fictitious debts to be proved against his estate : 

" If he has been entrusted with property, either merely to keep, or with 
special directions as to its use, and has nevertheless appropriated it to his own 
use : " (for such acts of peculation by trustees there is generally in England only 
a civil remedy, and that too through the Court of Chancery :) 

" If he has purchased real property in a borrowed name : 

"If he has concealed his books. 

" The following may also be proceeded against in a similar way : — 

" He who has not kept books, or whose books shall not exhibit his real 
situation as regards his debts and credits. 

" He who, having obtained a protection (sauf-conduit), shall not have duly 
attended." 

These various provisions relate only to commercial insolvency. The laws in 
regard to ordinary debts are considerably more rigorous to the debtor. 



CHAPTER X. 

OF INTERFERENCES OF GOVERNMENT GROUNDED ON 
ERRONEOUS THEORIES. 

§ 1. From the necessary functions of government, and 
the effects produced on the economical interests of society 
by their good or ill discharge, we proceed to the functions 
which belong to what I have termed, for want of a better 
designation, the optional class ; those which are sometimes 
assumed by governments and sometimes not, and which it 
is not unanimously admitted that they ought to exercise. 

Before entering on the general principles of the ques- 
tion, it will be advisable to clear from our path all those 
cases in which government interference works ill, because 
grounded on false views of the subject interfered with. 
Such cases have no connection with any theory respecting 
the proper limits of interference. There are some things 
with which governments ought not to meddle, and other 
things with which they ought ; but whether right or wrong 
in itself, the interference must work for ill, if government, 
not understanding the subject which it meddles with, med- 
dles to bring about a result which would be mischievous. 
We will therefore begin by passing in review various false 
theories, which have from time to time formed the ground 
of acts of government more or less economically injurious. 

Former writers on political economy have found it need- 
ful to devote much trouble and space to this department of 
their subject. It has now happily become possible, at least 
in our own country, greatly to abridge this purely negative 



532 B00K v - CHAPTER X. §1. 

part of our discussions. The false theories of political econ- 
omy which have done so much mischief in times past, are 
entirely discredited among all who have not lagged behind 
the general progress of opinion ; and few of the enactments 
which were once grounded on those theories still help to 
deform the statute-book. As the principles on which their 
condemnation rests have been fully set forth in other parts 
of this treatise, we may here content ourselves with a few 
brief indications. 

Of these false theories, the most notable is the doctrine 
of Protection to Native Industry ; a phrase meaning the 
prohibition, or the discouragement by heavy duties, of such 
foreign commodities as are capable of being produced at 
home. If the theory involved in this system had been cor- 
rect, the practical conclusions grounded on it would not 
have been unreasonable. The theory was, that to buy things 
produced at home was a national benefit, and the introduc- 
tion of foreign commodities, generally a national loss. It 
being at the same time evident that the interest of the con- 
sumer is to buy foreign commodities in preference to domes- 
tic whenever they are either cheaper or better, the interest 
of the consumer appeared in this respect to be contrary to 
the public interest ; he was certain, if left to his own incli- 
nations, to do what according to the theory was injurious to 
the public. 

It was shown, however, in our analysis of the effects of 
international trade, as it had been often shown by former 
writers, that the importation of foreign commodities, in the 
common course of traffic, never takes place, except when it 
is, economically speaking, a national good, by causing the 
same amount of commodities to be obtained at a smaller 
cost of labour and capital to the country. To prohibit, 
therefore, this importation, or impose duties which prevent 
it, is to render the labour and capital of the country less 
efficient in production than they would otherwise be ; and 
compel a waste, of the difference between the labour and 
capital necessary for the home production of the commod- 



PROTECTIONISM. 533 

ity, and that which is required for producing the things 
with which it can be purchased from abroad. The amount 
of national loss thus occasioned is measured by the excess 
of the price at which the commodity is produced, over that 
at which it could be imported. In the case of manufactured 
goods the whole difference between the two prices is ab- 
sorbed in indemnifying the producers for waste of labour, 
or of the capital which supports that labour. Those who 
are supposed to be benefited, namely the makers of the pro- 
tected articles, (unless they form an exclusive company, and 
have a monopoly against their own countrymen as well as 
against foreigners,) do not obtain higher profits than other 
people. All is sheer loss, to the country as well as to the 
consumer. When the protected article is a product of agri- 
culture — the waste of labour not being incurred on the 
whole produce, but only on what may be called the last in- 
stalment of it — the extra price is only in part an indemnity 
for waste, the remainder being a tax paid to the landlords. 

The restrictive and prohibitory policy was originally 
grounded on what is called the Mercantile System, which 
representing the advantage of foreign trade to consist solely 
in bringing money into the country, gave artificial encour- 
agement to exportation of goods, and discountenanced their 
importation. The only exceptions to the system were those 
required by the system itself. The materials and instru- 
ments of production were the subject of a contrary policy, 
directed however to the same end ; they were freely imported, 
and not permitted to be exported, in order that manufacturers, 
being more cheaply supplied with the requisites of manufac- 
ture, might be able to sell cheaper, and therefore to export 
more largely. For a similar reason, importation was allowed 
and even favoured, when confined to the productions of coun- 
tries which were supposed to take from the country still more 
than it took from them, thus enriching it by a favourable 
balance of trade. As part of the same system, colonies were 
founded, for the supposed advantage of compelling them to 
buy our commodities, or at all events not to buy those of* 



534 BOOK V. CHAPTER X. §1. 

any other country : in return for which restriction, we were 
generally willing to come under an equivalent obligation 
with respect to the staple productions of the colonists. The 
consequences of the theory were pushed so far, that it was 
not unusual even to give bounties on exportation, and in- 
duce foreigners to buy from us rather than from other coun- 
tries, by a cheapness which we artificially produced, by 
paying part of the price for them, out of our own taxes. 
This is a stretch beyond the point yet reached by any pri- 
vate tradesman in his competition for business. No shop- 
keeper, I should think, ever made a practice of bribing cus- 
tomers by selling goods to them at a permanent loss, mak- 
ing it up to himself from other funds in his possession. 

The principle of the Mercantile Theory is now given up 
even by writers and governments who still cling to the 
restrictive system. Whatever hold that system has over 
men's minds, independently of the private interests exposed 
to real or apprehended loss by its abandonment, is derived 
from fallacies other than the old notion of the benefits of 
heaping up money in the country. The most effective of 
these is the specious plea of employing our own countrymen 
and our national industry, instead of feeding and supporting 
the industry of foreigners. The answer to this, from the prin- 
ciples laid down in former chapters, is evident. Without 
reverting to the fundamental theorem discussed in an early 
part of the present treatise,* respecting the nature and 
sources of employment for labour, it is sufficient to say, 
what has usually been said by the advocates of free trade, 
that the alternative is not between employing our own peo- 
ple and foreigners, but between employing one class and 
another of our own people. The imported commodity is 
always paid for, directly or indirectly, with the produce of 
our own industry : that industry being, at the same time, 
rendered more productive, since, with the same labour and 
outlay, we are enabled to possess ourselves of a greater 
quantity of the article. Those who have not well consid- 

* Supra, vol. i. pp. 113 et seqq. 



PROTECTIONISM. 535 

ered the subject are apt to suppose that our exporting an 
equivalent in our own produce, for the foreign articles we 
consume, depends on contingencies — on the consent of for- 
eign countries to make some corresponding relaxation of 
their own restrictions, or on the question whether those 
from whom we buy are induced by that circumstance to 
buy more from us ; and that, if these things, or things 
equivalent to them, do not happen, the payment must be 
made in money. Now, in the first place, there is nothing 
more objectionable in a money payment than in payment 
by any other medium, if the state of the market makes it 
the most advantageous remittance ; and the money itself 
was first acquired, and would again be replenished, by the 
export of an equivalent value of our own products. But, in 
the next place, a very short interval of paying in money 
would so lower prices as either to stop a part of the import- 
ation, or raise up a foreign demand for our produce, suffi- 
cient to pay for the imports. I grant that this disturbance 
of the equation of international demand would be in some 
degree to our disadvantage, in the purchase of other im- 
ported articles ; and that a country which prohibits some 
foreign commodities, does, cceteris paribus, obtain those 
which it does not prohibit, at a less price than it would 
otherwise have to pay. To express the same thing in other 
words ; a country which destroys or prevents altogether 
certain branches of foreign trade, thereby annihilating a 
general gain to the world, which would be shared in some 
proportion between itself and other countries — does, in some 
circumstances, draw to itself, at the expense of foreigners, a 
larger share than would else belong to it of the gain arising 
from that portion of its foreign trade which it suffers to sub- 
sist. But even this it can only be enabled to do, if foreign- 
ers do not maintain equivalent prohibitions or restrictions 
against its commodities. In any case, the justice or expe- 
diency of destroying one of two gains, in order to engross a 
rather larger share of the other, does not require much dis- 
cussion ; the gain, too, which is destroyed, being, in propor- 



536 BOOK V. CHAPTER X. §!. 

tion to the magnitude of the transactions, the larger of the 
two, since it is the one which capital, left to itself, is sup- 
posed to seek by preference. 

Defeated as a general theory, the Protectionist doctrine 
finds support in some particular cases, from considerations 
which, when really in point, involve greater interests than 
mere saving of labour ; the interests of national subsistence 
and of national defence. The discussions on the Corn Laws 
have familiarized everybody with the plea, that we ought 
to be independent of foreigners for the food of the people ; 
and the Navigation Laws were grounded, in theory and 
profession, on the necessity of keeping up a " nursery of 
seamen " for the navy. On this last subject I at once admit, 
that the object is worth the sacrifice ; and that a country 
exposed to invasion by sea, if it cannot otherwise have suffi- 
cient ships and sailors of its own to secure the means of 
manning on an emergency an adequate fleet, is quite right 
in obtaining those means, even at an economical sacrifice in 
point of cheapness of transport. When the English naviga- 
tion laws were enacted, the Dutch, from their maritime 
skill and their low rate of profit at home, were able to car- 
ry tor other nations, England included, at cheaper rates 
than those nations could carry for themslves : which placed 
all other countries at a great comparative disadvantage in 
obtaining experienced seamen for their ships of war. The 
Navigation Laws, by which this deficiency was remedied, 
and at the same time a blow struck against the maritime 
power of a nation with which England was then frequently 
engaged in hostilities, were probably, though economically 
disadvantageous, politically expedient. But English ships 
and sailors can now navigate as cheaply as those of any 
other country ; maintaining at least an equal competition 
with the other maritime nations even in their own trade. 
The ends which may once have justified Navigation Laws, 
require them no longer, and afforded no reason for main- 
taining this invidious exception to the general rule of free 
trade. 



PROTECTIONISM. 537 

With regard to subsistence, the plea of the Protection- 
ists has been so often and so triumphantly met, that it 
requires little notice here. That country is the most stead- 
ily as well as the most abundantly supplied with food, 
which draws its supplies from the largest surface. It is 
ridiculous to found a general system of policy on 60 im- 
probable a danger as that of being at war with all the 
nations of the world at once ; or to suppose that, even if infe- 
rior at sea, a whole country could be blockaded like a town, 
or that the growers of food in other countries would not 
be as anxious not to lose an advantageous market, as we 
should be not to be deprived of their corn. On the subject, 
however, of subsistence, there is one point which deserves 
more especial consideration. In cases of actual or appre- 
hended scarcity, many countries of Europe are accustomed 
to stop the exportation of food. Is this, or not, sound policy ? 
There can be no doubt that in the present state of inter- 
national morality, a people cannot, any more than an indi- 
vidual, be blamed for not starving itself to feed others. 
But if the greatest amount of good to mankind on the 
whole, were the end aimed at in the maxims of internation- 
al conduct, such collective churlishness would certainly be 
condemned by them. Suppose that in ordinary circum- 
stances the trade in food were perfectly free, so that the 
price in one country could not habitually exceed that in 
any other by more than the cost of carriage, together with 
a moderate profit to the importer. A general scarcity en- 
sues, affecting all countries, but in unequal degrees. If the 
price rose in one country more than in others, it would be a 
proof that in that country the scarcity was severest, and 
that by permitting food to go freely thither from any other 
country, it would be spared from a less urgent necessity to 
relieve a greater. When the interest, therefore, of all coun- 
tries are considered, free exportation is desirable. To the 
exporting country considered separately, it may, at least on 
the particular occasion, be an inconvenience : but taking 
into account that the country which is now the giver, will 



538 BOOK V. CHAPTER X. § 1. 

in some future season be the receiver, and the one that is 
benefited by the freedom, I cannot but think that even to 
the apprehension of food-rioters it might be made apparent, 
that in such cases they should do to others what they would 
wish done to themselves. 

In countries in which the system of Protection is declin- 
ing, but not yet wholly given up, such as the United States, 
a doctrine has come into notice which is a sort of compro- 
mise between free trade and restriction, namely, that protec- 
tion for protection's sake is improper, but that there is noth- 
ing objectionable in having as much protection as may inci- 
dentally result from a tariff framed solely for revenue. 
Even in England, regret is sometimes expressed that a 
" moderate fixed duty " was not preserved on corn, on ac- 
count of the revenue it would yield. Independently, how- 
ever, of the general impolicy of taxes on the necessaries of 
life, this doctrine overlooks the fact, that revenue is received 
only on the quantity imported, but that the tax is paid on 
the entire quantity consumed. To make the public pay 
much that the treasury may receive a little, is no eligible 
mode of obtaining a revenue. In the case of manufactured 
articles the doctrine involves a palpable inconsistency. The 
object of the duty as a means of revenue, is inconsistent 
with its affording, even incidentally, any protection. It 
can only operate as protection in so far as it prevents im- 
portation ; and to whatever degree it prevents importation, 
it affords no revenue. 

The only case in which, on mere principles of political 
economy, protecting duties can be defensible, is when they 
are imposed temporarily (especially in a young and rising 
nation) in hopes of naturalizing a foreign industry, in itself 
perfectly suitable to the circumstances of the country. The 
superiority of one country over another in a branch of pro- 
duction, often arises only from having begun it sooner. 
There may be no inherent advantage on one part, or disad- 
vantage on the other, but only a present superiority of ac- 
quired skill and experience. A country which has this skill 



PROTECTIONISM. 539 

and experience yet to acquire, may in other respects be bet- 
ter adapted to the production than those which were earlier 
in the field ; and besides, it is a just remark of Mr. Rae, 
that nothing has a greater tendency to promote improve- 
ments in any branch of production, than its trial under a 
new set of conditions. But it cannot be expected that indi- 
viduals should, at their own risk, or rather to their certain 
loss, introduce a new manufacture, and bear the burden of 
carrying it on, until the producers have been educated up 
to the level of those with whom the processes are tradition- 
al. A protecting duty, continued for a reasonable time, 
will sometimes be the least inconvenient mode in which the 
nation can tax itself for the support of such an experiment. 
But the protection should be confined to cases in which 
there is good ground of assurance that the industry which 
it fosters will after a time be able to dispense with it ; nor 
should the domestic producers ever be allowed to expect 
that it will be continued to them beyond the time necessary 
for a fair trial of what they are capable of accomplishing. 

There is only one part of the Protectionist scheme which 
requires any further notice : its policy towards colonies, and 
foreign dependencies ; that of compelling them to trade ex- 
clusively with the dominant country. A country which 
thus secures to itself an extra foreign demand for its com- 
modities, undoubtedly gives itself some advantage in the 
distribution of the general gains of the commercial world. 
Since, however, it causes the industry and capital of the 
colony to be diverted from channels, which are proved to 
be the most productive, inasmuch as they are those into 
which industry and capital spontaneously tend to flow : 
there is a loss, on the whole, to the productive powers of 
the world, and the mother country does not gain so much 
as she makes the colony lose. If, therefore, the mother 
country refuses to acknowledge any reciprocity of obliga- 
tions, she imposes a tribute on the colony in an indirect 
mode, greatly more oppressive and injurious than the di- 
rect. But if, with a more equitable spirit, she submits her- 



540 BOOK T. CHAPTER X. §2. 

self to corresponding restrictions for the benefit of the colo- 
ny, the result of the whole transaction is the ridiculous one, 
that each party loses much, in order that the other may 
gain a little. 

§ 2. Next to the system of Protection, among mis- 
chievous interferences with the spontaneous course of indus- 
trial transactions, may be noticed certain interferences with 
contracts. One instance is that of the Usury Laws. These 
originated in a religious prejudice against receiving interest 
on money, derived from that fruitful source of mischief in 
modern Europe, the attempted adaptation to Christianity 
of doctrines and precepts drawn from the Jewish law. In 
Mahomedan nations the receiving of interest is formally in- 
terdicted, and rigidly abstained from ; and Sismondi has 
noticed, as one among the causes of the industrial inferior- 
ity of the Catholic, compared with the Protestant parts of 
Europe, that the Catholic church in the middle ages gave 
its sanction to the same prejudice ; which subsists, impaired 
but not destroyed, wherever that religion is acknowledged. 
"Where law or conscientious scruples prevent lending at in- 
terest, the capital which belongs to persons not in business 
is lost to productive purposes, or can be applied to them 
only in peculiar circumstances of personal connection, or by 
a subterfuge. Industry is thus limited to the capital of the 
undertakers, and to what they can borrow from persons not 
bound by the same laws or religion as themselves. In 
Mussulman countries the bankers and money dealers are 
either Hindoos, Armenians, or Jews. 

In more improved countries, legislation no longer dis- 
countenances the receipt of an equivalent for money lent ; 
but it has everywhere interfered with the free agency of the 
lender and borrower, by fixing a legal limit to the rate of 
interest, and making the receipt of more than the appointed 
maximum a penal offence. This restriction, though ap- 
proved by Adam Smith, has been condemned by all en- 
lightened persons since the triumphant onslaught made 



USURY LAWS. 541 

upon it by Bentham in his " Letters on Usury," which may 
still be referred to as the best extant writing on the subject. 
Legislators may enact and maintain Usury Laws from 
one of two motives : ideas of public policy, or concern for 
the interest of the parties in the contract ; in this case, of 
one party alone, the borrower. As a matter of policy, the 
notion may possibly te, that it is for the general good that 
interest should be low. It is however a misapprehension 
of the causes which influence commercial transactions, to 
suppose that the rate of interest is really made lower by 
law, than it would be made by the spontaneous play of sup- 
ply and demand. If the competition of borrowers, left un- 
restrained, would raise the rate of interest to six per cent, 
this proves that at live there would be a greater demand 
for loans, than there is capital in the market to supply. If 
the law in these circumstances permits no interest beyond 
five per cent, there will be some lenders, who not choosing 
to disobey the law, and not being in a condition to employ 
their capital otherwise, will content themselves with the le- 
gal rate : but others, finding that in a season of pressing de- 
mand, more may be made of their capital by other means 
than they are permitted to make by lending it, will not lend 
it at all ; and the loanable capital, already too small for the 
demand, will be still further diminished. Of the disap- 
pointed candidates there will be many at such periods, who 
must have their necessities supplied at any price, and these 
will readily find a third section of lenders, who will not be 
averse to join in a violation of the law, either by circuitous 
transactions partaking of the nature of fraud, or by relying 
on the honour of the borrower. The extra expense of the 
roundabout mode of proceeding, and an equivalent for the 
risk of non-payment and of legal penalties, must be paid by 
the borrower, over and above the extra interest which would 
have been required of him by the general state of the mar- 
ket. The laws which were intended to lower the price paid 
by him for pecuniary accommodation, end thus in greatly 
increasing it. These laws have also a directly demoralizing 



542 BOOK V. CHAPTER X. §2. 

tendency. Knowing the difficulty of detecting an illegal 
pecuniary transaction between two persons, in which no 
third person is involved, so long as it is the interest of both 
to keep the secret, legislators have adopted the expedient 
of tempting the borrower to become the informer, by mak- 
ing the annulment of the debt a part of the penalty for the 
offence ; thus rewarding men for obtaining the property of 
others by false promises, and then not only refusing pay- 
ment, but invoking legal penalties on those who have helped 
them in their need. The moral sense of mankind very 
rightly infamizes those who resist an otherwise just claim 
on the ground of usury, and tolerates such a plea only when 
resorted to as the best legal defence available against an at- 
tempt really considered as partaking of fraud or extortion. 
But this very severity of public opinion renders the enforce- 
ment of the laws so difficult, and the infliction of the penal- 
ties so rare, that when it does occur it merely victimizes an 
individual, and has no effect on general practice. 

In so far as the motive of the restriction may be sup- 
posed to be, not public policy, but regard for the interest of 
the borrower, it would be difficult to point out any case in 
which such tenderness on the legislator's part is more mis- 
placed. A person of sane mind, and of the age at which 
persons are legally competent to conduct their own con- 
cerns, must be presumed to be a sufficient guardian of his 
pecuniary interests. If he may sell an estate, or grant a re- 
lease, or assign away all his property, without control from 
the law, it seems very unnecessary that the only bargain 
which he cannot make without its intermeddling, should be 
a loan of money. The law seems to presume that the 
money-lender, dealing with necessitous persons, can take 
advantage of their necessities, and exact conditions limited 
only by his own pleasure. It might be so if there were 
only one money-lender within reach. But when there is the 
whole moneyed capital of a wealthy community to resort 
to, no borrower is placed under any disadvantage in the 
market merely by the urgency of his need. If he cannot 



USURY LAWS. 543 

borrow at the interest paid by other people, it must be be- 
cause he cannot give such good security : and competition 
will limit the extra demand to a fair equivalent for the risk 
of his proving insolvent. Though the law intends favour to 
the borrower, it is to him above all that injustice is, in this 
case, done by it. What can be more unjust than that a 
person who cannot give perfectly good security, should be 
prevented from borrowing of persons who are willing to 
lend money to him, by their not being permitted to receive 
the rate of interest which would be a just equivalent for 
their risk ? Through the mistaken kindness of the law, he 
must either go without the money which is perhaps neces- 
sary to save him from much greater losses, or be driven to 
expedients of a far more ruinous description, which the law 
either has not found it possible, or has not happened, to in- 
terdict. 

Adam Smith rather hastily expressed the opinion, that 
only two kinds of persons, " prodigals and projectors," could 
require to borrow money at more than the market rate of 
interest. He should have included all persons who are in any 
pecuniary difficulties, however temporary their necessities 
may be. It may happen to any person in business, to be 
disappointed of the resources on which he had calculated 
for meeting some engagement, the non-fulfilment of which 
on a fixed day would be bankruptcy. In periods of com- 
mercial difficulty, this is the condition of many prosperous 
mercantile firms, who become competitors for the small 
amount of disposable capital which, in a time of general 
distrust, the owners are willing to part with. Up to the 
relaxation of the usury laws a few years ago, the limitations 
imposed by those laws were felt as a most serious aggrava' 
tion of every commercial crisis. Merchants who could have 
obtained the aid they required at an interest of seven or 
eight per cent, for short periods, were obliged to give 20 or 
30 per cent., or to resort to forced sales of goods at a still 
greater loss. Experience having obtruded these evils on 
the notice of Parliament, a sort of compromise took place, 



544 BOOK V. CHAPTER X. §2. 

of which English legislation affords so many instances, and 
which helps to make our laws and policy the mass of incon- 
sistency that they are. The law was reformed as a person 
reforms a tight shoe, who cats a hole in it where it pinches 
hardest, and continues to wear it. Retaining the erroneous 
principle as a general rule, Parliament allowed an excep- 
tion in the case in which the practical mischief was most 
flagrant. It left the usury laws unrepealed, but exempted 
bills of exchange, of not more than three months' date, from 
their operation. Some years afterwards the laws were re- 
pealed in regard to all other contracts, but left in force as to 
all those which relate to land. Not a particle of reason could 
be given for making this extraordinary distinction ; but the 
" agricultural mind " was of opinion that the interest on 
mortgages, though it hardly ever came up to the permitted 
point, would come up to a still higher point ; and the usury 
laws were maintained that the landlords might, as they 
thought, be enabled to borrow below the market rate, as the 
corn -laws were kept up that the same class might be able 
to sell corn above the market rate. The modesty of the 
pretension was quite worthy of the intelligence which could 
think that the end aimed at was in any w r ay forwarded by 
the means used. 

With regard to the " prodigals and projectors " spoken 
of by Adam Smith ; no law can prevent a prodigal from 
ruining himself, unless it lays him or his property under ac- 
tual restraint, according to the unjustifiable practice of the 
Roman Law and some of the Continental systems founded 
on it. The only effect of usury law upon a prodigal, is to 
make his ruin rather more expeditious, by driving him to a 
disreputable class of money-dealers, and rendering the con- 
ditions more onerous by the extra risk created by the law. 
As for projectors, a term, in its unfavourable sense, rather 
unfairly applied to every person who has a project ; such 
laws may put a veto upon the prosecution of the most prom- 
ising enterprise, when planned, as it generally is, by a per- 
son who does not possess capital adequate to its successful 



REGULATION OF THE PRICE OF FOOD. 54.5 

completion. Many of the greatest improvements were at 
first looked shyly on by capitalists, and had to wait long 
before they found one sufficiently adventurous to be the 
first in a new path : many years elapsed before Stephenson 
could convince even the enterprising mercantile public of 
Liverpool and Manchester, of the advantage of substituting 
railways for turnpike-roads ; and plans on which great la- 
bour and large sums have been expended with little visible 
result, (the epoch in their progress when predictions of fail- 
ure are most rife,) may be indefinitely suspended, or alto- 
gether dropped, and the outlay all lost, if, when the original 
funds are exhausted, the law will not allow more to be 
raised on the terms on which people are willing to expose it 
to the chances of an enterprise not yet secure of success. 

§ 3. Loans are not the only kind of contract, of which 
governments have thought themselves qualified to regulate 
the conditions better than the persons interested. There is 
scarcely any commodity which they have not, at some place 
or time, endeavoured to make either dearer or cheaper than 
it would be if left to itself. The most plausible case for arti- 
ficially cheapening a commodity, is that of food. The de- 
sirableness of the object is in this case undeniable. But 
since the average price of food, like that of other things, 
conforms to the cost of production with the addition of the 
usual profit ; if this price is not expected by the farmer, he 
will, unless compelled by law, produce no more than he re- 
quires for his own consumption : and the law therefore, if 
absolutely determined to have food cheaper, must substitute, 
for the ordinary motives to cultivation, a system of penal- 
ties. If it shrinks from doing this, it has no resource but 
that of taxing the whole nation, to give a bounty or pre- 
mium to the grower or importer of corn, thus giving every- 
body cheap bread at the expense of all : in reality a largess 
to those who do not pay taxes, at the expense of those who 
do ; one of the forms of a practice essentially bad, that of 

7t 



546 BOOK V. CHAPTER X. §3. 

converting the working classes into unworking classes by 
making them a present of subsistence. 

It is not however so much the general or average price 
of food, as its occasional high price in times of emergency, 
which governments have studied to reduce. In some cases, 
as for example the famous " maximum " of the revolution- 
ary government of 1793, the compulsory regulation was an 
attempt by the ruling powers to counteract the necessary 
consequences of their own acts ; to scatter an indefinite 
abundance of the circulating medium with one hand, and 
keep down prices with the other ; a thing manifestly im- 
possible under any regime except one of unmitigated terror. 
In case of actual scarcity, governments are often urged, as 
they were in the Irish emergency of 1847, to take measures 
of some sort for moderating the price of food. But the 
price of a thing cannot be raised by deficiency of sapply, 
beyond what is sufficient to make a corresponding reduction 
of the consumption ; and if a government prevents this re- 
duction from being brought about by a rise of price, there 
remains no mode of effecting it unless by taking possession 
of all the food, and serving it out in rations, as in a besieged 
town. In a real scarcity, nothing can afford general relief, 
except a determination by the richer classes to diminish 
their own consumption. If they buy and consume their 
usual quantity of food, and content themselves with giving 
money, they do no good. The price is forced up until the 
poorest competitors have no longer the means of competing, 
and the privation of food is thrown exclusively upon the 
indigent, the other classes being only affected pecuniarily. 
When the supply is insufficient, somebody must consume 
less, and if every rich person is determined not to be that 
somebody, all they do by subsidizing their poorer competi- 
tors is to force up the price so much the higher, with no 
effect but to enrich the corn-dealer, the very reverse of what 
is desired by those who recommend such measures. All 
that governments caa do in such emergencies, is to counsel 
a general moderation in consumption, and to interdict such 



MONOPOLIES. 547 

kinds of it as are not of primary importance. Direct meas- 
ures at the cost of the state, to procure food from a distance, 
are expedient when from peculiar reasons the thing is not 
likely to be done by private speculation. In any other case 
they are a great error. Private speculators will not, in such 
cases, venture to compete with the government ; and though 
a government can do more than any one merchant, it cannot 
do nearly so much as all merchants. 

§ 4. Governments, however, are oftener chargeable 
with having attempted, too successfully, to make things 
dear, than with having aimed by wrong means at making 
them cheap. The usual instrument for producing artificial 
dearness is monopoly. To confer a monopoly upon a pro- 
ducer or dealer, or upon a set of producers or dealers not 
too numerous to combine, is to give them the power of levy- 
ing any amount of taxation on the public, for their indi- 
vidual benefit, which will not make the public forego the 
use of the commodity. When the sharers in the monopoly 
are so numerous and so widely scattered that they are pre- 
vented from combining, the evil is considerably less : but 
even then the competition is not so active among a limited, 
as among an unlimited number. Those who feel assured of a 
fair average proportion in the general business, are seldom 
eager to get a larger share, by foregoing a portion of their 
profits. A limitation of competition, however partial, may 
have mischievous effects quite disproportioned to the appar- 
ent cause. The mere exclusion of foreigners, from a branch 
of industry open to the free competition of every native, 
has been known, even in England, to render that branch a 
conspicuous exception to the general industrial energy of 
the country. The silk manufacture of England remained 
far behind that of other countries of Europe, so long as the 
foreign fabrics were prohibited. In addition to the tax lev- 
ied for the profit, real or imaginary, of the monopolists, the 
consumer thus pays an additional tax for their laziness and 
incapacity. When relieved from the immediate stimulus 



548 BOOK V. CHAPTER X. §4. 

of competition, producers and dealers grow indifferent to 
the dictates of their ultimate pecuniary interest ; preferring 
to the most hopeful prospects, the present ease of adhering 
to routine. A person who is already thriving, seldom puts 
himself out of his way to commence even a lucrative im- 
provement, unless urged by the additional motive of fear 
lest some rival should supplant him by getting possession 
of it before him. 

The condemnation of monopolies ought not to extend to 
patents, by which the originator of an improved process is 
allowed to enjoy, for a limited period, the exclusive privi- 
lege of using his own improvement. This is not making 
the commodity dear for his benefit, but merely postponing 
a part of the increased cheapness, which the public owe to 
the inventor, in order to compensate and reward him for 
the service. That he ought to be both compensated and 
rewarded for it, will not be denied, and also that if all were 
at once allowed to avail themselves of his ingenuity, with- 
out having shared the labours or the expenses which he had 
to incur in bringing his idea into a practical shape, either 
such expenses and labours would be undergone by nobody, 
except very opulent and very public-spirited persons, or the 
state must put a value on the service rendered by an in- 
ventor, and make him a pecuniary grant. This has been 
done in some instances, and may be done without inconve- 
nience in cases of very conspicuous public benefit ; but in 
general an exclusive privilege, of temporary duration, is 
preferable ; because it leaves nothing to any one's discre- 
tion ; because the reward conferred by it depends upon the 
invention's being found useful, and the greater the useful- 
ness the greater the reward ; and because it is paid by the 
very persons to whom the service is rendered, the consu- 
mers of the commodity. So decisive, indeed, are those con- 
siderations, that if the system of patents were abandoned 
for that of rewards by the state, the best shape which these 
could assume would be that of a small temporary tax, im- 
posed for the inventor's benefit, on all persons making use 



COMBINATION LAWS. 549 

of the invention. To this, however, or to any other system 
which would vest in the state the power of deciding wheth- 
er an inventor should derive any pecuniary advantage from 
the public benefit which he confers, the objections are evi- 
dently stronger and more fundamental than the strongest 
which can possibly be urged against patents : and I have 
seen with real alarm several recent attempts, in quarters 
carrying some authority, to impugn the principle of patents 
altogether ; attempts which, if practically successful, would 
enthrone free stealing under the prostituted name of free 
trade, and make the men of brains, still more than at pres- 
ent, the needy retainers and dependents of the men of 
money-bags. 

§ 5. I pass to another kind of government interfer- 
ence, in which the end and the means are alike odious, but 
which existed in England until not so much as a generation 
ago, and is in full vigour at this day in some other coun- 
tries. I mean the laws against combinations of workmen to 
raise wages ; laws enacted and maintained for the declared 
purpose of keeping wages low, as the famous Statute of La- 
bourers was passed by a legislature of employers, to prevent 
the labouring class, when its numbers had been thinned by 
a pestilence, from taking advantage of the diminished com- 
petition to obtain higher wages. Such laws exhibit the in- 
fernal spirit of the slave master, when to retain the working 
classes in avowed slavery has ceased to be practicable. 

If it were possible for the working classes, by combining 
among themselves, to raise or keep up the general rate of 
wages, it needs hardly be said that this would be a thing 
not to be punished, but to be welcomed and rejoiced at. 
Unfortunately the effect is quite beyond attainment by such 
means. The multitudes who compose the working class are 
too numerous and too widely scattered to combine at all, 
much more to combine effectually. If they could do so, 
they might doubtless succeed in diminishing the hours of 
labour, and obtaining the same wages for less work. But 



550 BOOK V. CHAPTER X. §5. 

if they aimed at obtaining actually higher wages than the 
rate fixed by demand and supply — the rate which distrib- 
utes the whole circulating capital of the country among 
the entire working population — this could only be accom- 
plished by keeping a part of their number permanently out 
of employment. As support from public charity would of 
course be refused to those who could get work and would 
not accept it, they would be thrown for support upon the 
trades union of which they were members ; and the work- 
people collectively would be no better off than before, hav- 
ing to support the same numbers out of the same aggregate 
wages. In this way, however, the class would have its at- 
tention forcibly drawn to the fact of a superfluity of num- 
bers, and to the necessity, if they would have higher wages, 
of proportioning the supply of labour to the demand. 

Combinations to keep up wages are sometimes successful, 
in trades where the workpeople are few in number, and col- 
lected in a small number of local centres. It is questionable 
if combinations ever had the smallest effect on the permanent 
remuneration of spinners or weavers ; but the journeymen 
type-founders, by a close combination, are able, it is said, to 
keep up a rate of wages much beyond that which is usual in 
employments of equal hardness and skill ; and even the 
tailors, a much more numerous class, are understood to have 
had, to some extent, a similar success. A rise of wages, thus 
confined to particular employments, is not (like a rise of gen- 
eral wages) defrayed from profits, but raises the value and 
price of the particular article, and falls on the consumer ; 
the capitalist who produces the commodity being only injured 
in so far as the high price tends to narrow the market ; and 
not even then, unless it does so in a greater ratio than that 
of the rise of price ; for though, at higher wages, he employs, 
with a given capital, fewer workpeople, and obtains less of 
the commodity, yet, if he can sell the whole of this dimin- 
ished quantity at the higher price, his profits are as great as 
before. 

This partial rise of wages, if not gained at the expense 



COMBINATION LAWS. 551 

of the remainder of the working class, ought not to be re- 
garded as an evil. The consumer, indeed, must pay for it ; 
but cheapness of goods is desirable only when the cause of 
it is that their production costs little labour, and not when 
occasioned by that labour's being ill remunerated. It may 
appear, indeed, at first sight, that the high wages of the type- 
founders (for example) are obtained at the general cost of 
the labouring class. This high remuneration either causes 
fewer persons to find employment in the trade, or, if not, 
must lead to the investment of more capital in it, at the ex- 
pense of other trades : in the first case, it throws an addi- 
tional number of labourers on the general market ; in the 
second, it withdraws from that market a portion of the de- 
mand ; effects, both of which are injurious to the working 
classes. Such, indeed, would really be the result of a suc- 
cessful combination in a particular trade or trades, for some 
time after its formation ; but when it is a permanent thing, 
the principles so often insisted upon in this treatise, show 
that it can have no such effect. The habitual earnings of 
the working classes at large can be affected by nothing but 
the habitual requirements of the labouring people : these 
indeed may be altered, but while they remain the same, 
wages never fall permanently below the standard of these 
requirements, and do not long remain above that standard. 
If there had been no combinations in particular trades, and 
the wages of those trades had never been kept above the 
common level, there is no reason to suppose that the com- 
mon level would have been at all higher than it now is. 
There would merely have been a greater number of people 
altogether, and a smaller number of exceptions to the ordi- 
nary low rate of wages. 

If, therefore, no improvement were to be hoped for in 
the general circumstances of the working classes, the snccess 
of a portion of them, however small, in keeping their wages 
by combination above the market rate, would be wholly a 
matter of satisfaction. But when the elevation of the char- 
acter and condition of the entire body has at last become a 



552 BOOK V. CHAPTER X. §5. 

thing not beyond the reach of rational effort, it is time that 
the better paid classes of skilled artisans should seek their 
own advantage in common with, and not by the exclusion 
of, their fellow labourers. While they continue to fix their 
hopes on hedging themselves in against competition, and 
protecting their own wages by shutting out others from 
access to their employment, nothing better can be expected 
from them than that total absence of any large and generous 
aims, that almost open disregard of all other objects than 
high wages and little work for their own small body, which 
were so deplorably evident in the proceedings and manifes- 
toes of the Amalgamated Society of Engineers during their 
quarrel with their employers. Success, even if attainable, 
in raising up a protected class of working people, would 
now be a hindrance, instead of a help, to the emancipation 
of the working classes at large. 

But though combinations to keep up wages are seldom 
effectual, and when effectual, are, for the reasons which I 
have assigned, seldom desirable, the right of making the 
attempt is one which cannot be refused to any portion of 
the working population without great injustice, or without 
the probability of fatally misleading them respecting the 
circumstances which determine their condition. So long as 
combinations to raise wages were prohibited by law, the 
law appeared to the operatives to be the real cause of the 
low wages which there was no denying that it had done its 
best to produce. Experience of strikes has been the best 
teacher of the labouring classes on the subject of the relation 
between wages and the demand and supply of labour : and 
it is most important that this course of instruction should 
not be disturbed. 

It is a great error to condemn, jper se and absolutely, 
either trades unions or the collective action of strikes. I 
grant that a strike is wrong whenever it is foolish, and it is 
foolish whenever it attempts to raise wages above that mar- 
ket rate which is rendered possible by the demand and 
supply. But demand and supply are not physical agencies, 



COMBINATION LAWS. 553 

which thrust a given amount of wages into a labourer's 
hand without the participation of his own will and actions. 
The market rate is not fixed for him by some self-acting 
instrument, but is the result of bargaining between human 
beings — of what Adam Smith calls " the higgling of the 
market ; " and those who do not " hiergle " will long con- 

7 GO o 

tinue to pay, even over a counter, more than the market 
price for their purchases. Still more might poor labourers 
who have to do with rich employers, remain long without 
the amount of wages which the demand for their labour 
would justify, unless, in vernacular phrase, they stood out 
for it : and how can they stand out for terms without organ- 
ized concert ? What chance would any labourer have, who 
struck singly for an advance of wages ? How could he 
even know whether the state of the market admitted of a 
rise, except by consultation with his fellows, naturally lead- 
ing to concerted action ? I do not hesitate to say that asso- 
ciations of labourers, of a nature similar to trades unions, far 
from being a hindrance to a free market for labour, are the 
necessary instrumentality of that free market ; the indis- 
pensable means of enabling the sellers of labour to take due 
care of their own interests under a system of competition. 
There is an ulterior consideration of much importance, to 
which attention was for the first time drawn by Mr. Henry 
Fawcett, in an article in the Westminster Review. Expe- 
rience has at length enabled the more intelligent trades to 
take a tolerably correct measure of the circumstances on 
which the success of a strike for an advance of wages 
depends. The workmen are now nearly as well informed as 
the master, of the state of the market for his commodities ; 
they can calculate his gains and his expenses, they know 
when his trade is or is not prosperous, and only when it is, 
are they ever again likely to strike for higher wages ; which 
wages their known readiness to strike makes their employers 
for the most part, willing in that case, to concede. The 
tendency, therefore, of this state of things is to make a rise 
of wages, in any particular trade, usually consequent upon 



554 BOOK V. CHAPTER X. §5. 

a rise of profits, which, as Mr. Fawcett observes, is a com- 
mencement of that regular participation of the labourers in 
the profits derived from their labour, every tendency to 
which, for the reason stated in a previous chapter,* it is so 
important to encourage, since to it we have chiefly to look for 
any radical improvement in the social and economical rela- 
tion between labour and capital. Strikes, therefore, and the 
trade societies which render strikes possible, are for these 
various reasons not a mischievous, but on the contrary, a 
valuable part of the existing machinery of society. 

It is, however, an indispensable condition of tolerating 
combinations, that they should be voluntary. No severity, 
necessary to the purpose, is too great to be employed against 
attempts to compel workmen to join a union, or take part 
in a strike, by threats or violence. Mere moral compulsion 
by the expression of opinion, the law ought not to interfere 
with ; it belongs to more enlightened opinion to restrain it, 
by rectifying the moral sentiments of the people. Other 
questions arise when the combination, being voluntary, pro- 
poses to itself objects really contrary to the public good. 
High wages and short hours are generally good objects, or, 
at all events, may be so : but in many trades unions, it is 
among the rules that there shall be no task work, or no 
difference of pay between the most expert workmen and the 
most unskilful, or that no member of the union shall earn 
more than a certain sum per week, in order that there may 
be more employment for the rest ; and the abolition of 
piece work, under more or less of modification, held a con- 
spicuous place among the demands of the Amalgamated 
Society. These are combinations to effect objects which are 
pernicious. Their success, even when only partial, is a 
public mischief; and were it complete, would be equal in 
magnitude to almost any of the evils arising from bad 
economical legislation. Hardly anything worse can be 
said of the worst laws on the subject of industry and its 
remuneration, consistent with the personal freedom of the 

* Supra, book v. chap. viL 



COMBINATION LAWS. 555 

labourer, than that they place the energetic and the \dle, 
the skilful and the incompetent, on a level : and this, in so 
far as it is in itself possible, it is the direct tendency of the 
regulations of these unions to do. It does not, however, 
follow as a consequence that the law would be warranted 
in making the formation of such associations illegal and 
punishable. Independently of all considerations of consti- 
tutional liberty, the best interests of the human race impera- 
tively require that all economical experiments, voluntarily 
undertaken, should have the fullest license, and that force 
and fraud should be the only means of attempting to bene- 
fit themselves, which are interdicted to the less fortunate 
classes of the community.* 

§ 6. Among the modes of undue exercise of the 
power of government, on which I have commented in this 
chapter, I have included only such as rest on theories which 
have still more or less of footing in the most enlightened 
countries. I have not spoken of some which have done still 
greater mischief in times not long past, but which are now 
generally given up, at least in theory, though enough of 
them still remains in practice to make it impossible as yet 
to class them among exploded errors. 

The notion, for example, that a government should 
choose opinions for the people, and should not suffer any 
doctrines in politics, morals, law, or religion, but such as it 



* Whoever wishes to understand the question of Trade Combinations as seen 
from the point of view of the working people, should make himself acquainted 
with a pamphlet published in 1860 under the title " Trades Unions and Strikes, 
their Philosophy and Intention, by T. J. Dunning, Secretary to the London Con- 
solidated Society of Bookbinders." There are many opinions in this able tract 
in which I only partially, and some in which I do not at all, coincide. But 
there are also many sound arguments, and an instructive exposure of the com ; 
mon fallacies of opponents. Readers of other classes will see with surprise, not 
only how great a portion of truth the Unions have on their side, but how much 
less flagrant and condemnable even their errors appear, when seen under the 
aspect in which it is only natural that the working classes should themselves re- 
gard them. 



556 BOOK V. CHAPTER X. §6. 

approves, to be printed or publicly professed, may be said to 
be altogether abandoned as a general thesis. It is now well 
understood that a regime of this sort is fatal to all prosperity, 
even of an economical kind : that the human mind, when 
prevented either by fear of the law or by fear of opinion 
from exercising its faculties freely on the most important 
subjects, acquires a general torpidity and imbecility, by 
which, when they reach a certain point, it is disqualified 
from making any considerable advances even in the common 
affairs of life, and which, when greater still, make it gradually 
lose even its previous attainments. There cannot be a more 
decisive example than Spain and Portugal, for two centuries 
after the Reformation. The decline of those countries in 
national greatness and even in material civilization, while 
almost all the other nations of Europe were uninterruptedly 
advancing, has been ascribed to various causes, but there is 
one which lies at the foundation of them all : the Holy 
Inquisition, and the system of mental slavery of which it is 
the symbol. 

Yet although these truths are very widely recognised, 
and freedom both of opinion and of discussion is admitted 
as an axiom in all free countries, this apparent liberality 
and tolerance has acquired so little of the authority of a 
principle, that it is always ready to give way to the dread 
or horror inspired by some particular sort of opinions. 
Within the last ten or fifteen years several individuals have 
suffered imprisonment, for the public profession, sometimes 
in a very temperate manner, of disbelief in religion ; and it 
is probable that both the public and the government, at the 
first panic which arises on the subject of Chartism or Com- 
munism, will fly to similar means for checking the prop- 
agation of democratic or anti-property doctrines. In this 
country, however, the effective restraints on mental freedom 
proceed much less from the law or the government, than 
from the intolerant temper of the national mind ; arising no 
longer from even as respectable a source as bigotry or fana- 



COMBINATION LAWS. 557 

ticism, but rather from the general habit, both in opinion 
and conduct, of making adherence to custom the rule of life, 
and enforcing it, by social penalties, against all persons 
who, without a party to back them, assert their individual 
independence. 



CHAPTEE XL 

OF THE GROUNDS AND LIMITS OF THE LAISSER-FAIRE 
OR NON-INTERFERENCE PRINCIPLE. 

§ 1. "We have now reached the last part of our under- 
taking ; the discussion, so far as suited to this treatise (that 
is, so far as it is a question of principle, not detail) of the 
limits of the province of government ; the question, to what 
objects governmental intervention in the affairs of society 
may or should extend, over and above those which neces- 
sarily appertain to it. No subject has been more keenly con- 
tested in the present age : the contest, however, has chiefly 
taken place round certain select points, with only flying 
excursions in the rest of the field. Those indeed who have 
discussed any particular question of government inter- 
ference, such as state education (spiritual or secular), regu- 
lation of hours of labour, a public provision for the poor, 
&c. have often dealt largely in general arguments, far out- 
stretching* the special application made of them, and have 
shown a sufficiently strong bias either in favour of letting 
things alone, or in favour of meddling ; but have seldom 
declared, or apparently decided in their own minds, how 
far they would carry either principle. The supporters of 
interference have been content with asserting a general 
right and duty on the part of government to intervene, 
wherever its intervention would be useful : and when those 
who have been called the laisser-faire school have attempt- 
ed any definite limitation of the province of government, 
they have usually restricted it to the protection of person 



LIMITS OF THE PROVINCE OF GOVERNMENT. 559 

and property against force and fraud ; a definition to which 
neither they nor any one else can deliberately adhere, since 
it excludes, as has been shown in a preceding chapter,* 
some of the most indispensable and unanimously recognised 
of the duties of government. 

Without professing entirely to supply this deficiency of 
a general theory, on a question which does not, as I con- 
ceive, admit of any universal solution, I shall attempt to 
afford some little aid towards the resolution of this class of 
questions as they arise, by examining, in the most general 
point of view in which the subject can be considered, what 
are the advantages, and what the evils or inconveniences, 
of government interference. 

We must set out by distinguishing between two kinds 
of intervention by the government, which, though they may 
relate to the same subject, differ widely in their nature and 
effects, and require, for their justification, motives of a very 
different degree of urgency. The intervention may extend to 
controlling the free agency of individuals. Government may 
interdict all persons from doing certain things ; or from 
doing them without its authorization ; or may prescribe to 
them certain things to be done, or a certain manner of doing 
things which it is left optional with them to do or to abstain 
from. This is the authoritative interference of government. 
There is another kind of intervention which is not authori- 
tative : when a government, instead of issuing a command 
and enforcing it by penalties, adopts the course so seldom 
resorted to by governments, and of which such important 
use might be made, that of giving advice, and promulgating 
information ; or when, leaving individuals free to use their 
own means of pursuing any object of general interest, the 
government, not meddling with them, but not trusting the 
object solely to their care, establishes, side by side with their 
arrangements, an agency of its own for a like purpose. Thu? 
it is one thing to maintain a Church Establishment, and 
another to refuse toleration to other religions, or to persons 

* Supra, book v. chap. 1. 



560 BOOK V. CHAPTER XI. §2. 

professing no religion. It is one thing to provide schools or 
colleges, and another to require that no person shall act as 
an instructor of youth without a government license. There 
might be a national bank or a government manufactory, 
without any monopoly against private banks and manufac- 
tories. There might be a post-office, without penalties 
against the conveyance of letters by other means. There 
may be a corps of government engineers for civil pur- 
poses, while the profession of a civil engineer is free to 
be adopted by every one. There may be public hospitals, 
without any restriction upon private medical or surgical 
practice. 

§ 2. It is evident, even at first sight, that the authori- 
tative form of government intervention has a much more 
limited sphere of legitimate action than the other. It re- 
quires a much stronger necessity to justify it in any case ; 
while there are large departments of human life from which 
it must be unreservedly and imperiously excluded. What- 
ever theory we adopt respecting the foundation of the social 
union, and under whatever political institutions we live, there 
is a circle around every individual human being, which no 
government, be it that of one, of a few, or of the many, 
ought to be permitted to overstep : there is a part of the life 
of every person who has come to years of discretion, within 
which the individuality of that person ought to reign uncon- 
trolled either by any other individual or by the public col- 
lectively. That there is, or ought to be, some space in hu- 
man existence thus entrenched around, and sacred from au- 
thoritative intrusion, no one who professes the smallest re- 
gard to human freedom or dignity will call in question : the 
point to be determined is, where the limit should be placed ; 
how large a province of human life this reserved territor5 
should include. I apprehend that it ought to include all 
that part which concerns only the life, whether inward or 
outward, of the individual, and does not affect the interests 
of others, or affects them only through the moral influence 



LIMITS OF THE PROVINCE OF GOVERNMENT. 561 

of example. With respect to the domain of the inward 
consciousness, the thoughts and feelings, and as much of 
external conduct as is personal only, involving no conse- 
quences, none at least of a painful or injurious kind, to 
other people ; I hold that it is allowable in all, and in the 
more thoughtful and cultivated often a duty, to assert and 
promulgate, with all the force they are capable of, their 
opinion of what is good or bad, admirable or contemptible, 
but not to compel others to conform to that opinion ; wheth- 
er the force used is that of extra-legal coercion, or exerts it- 
self by means of the law. 

Even in those portions of conduct which do affect the 
interest of others, the onus of making out a case always lies 
on the defenders of legal prohibitions. It is not a merely 
constructive or presumptive injury to others, which will 
justify the interference of law with individual freedom. To 
be prevented from doing what one is inclined to, or from 
acting according to one's own judgment of what is desir- 
able, is not only always irksome, but always tends, pro 
tanto, to starve the development of some portion of the bod- 
ily or mental faculties, either sensitive or active ; and unless 
the conscience of the individual goes freely with the legal 
restraint, it partakes, either in a great or in a small degree, 
of the degradation of slavery. Scarcely any degree of util- 
ity, short of absolute necessity, will justify a prohibitory 
regulation, unless it can also be made to recommend itself 
to the general conscience ; unless persons of ordinary good 
intentions either believe already, or can be induced to be- 
lieve, that the thing prohibited is a thing which they ought 
not to wish to do. 

It is otherwise with governmental interferences, which 
do not restrain individual free agency. When a govern- 
ment provides means for fulfilling a certain end, leaving in- 
dividuals free to avail themselves of different means if m 
their opinion preferable, there is no infringement of liberty, 
no irksome or degrading restraint. One of the principal 
objections to government interference is then absent. 
75 



562 BOOK V. CHAPTER XL § 3. 

There is, however, in almost all forms of government agen- 
cy, one thing which is compulsory ; the provision of the 
pecuniary means. These are derived from taxation ; or, if 
existing in the form of an endowment derived from public 
property, they are still the cause of as much compulsory 
taxation as the sale or the annual proceeds of the property 
would enable to be dispensed with.* And the objection ne- 
cessarily attaching to compulsory contributions, is almost al- 
ways greatly aggravated by the expensive precautions and 
onerous restrictions, which are indispensable to prevent eva- 
sion of a compulsory tax. 

§ 3. A second general objection to government agency, 
is that every increase of the functions devolving on the gov- 
ernment is an increase of its power, both in the form of au- 
thority, and still more, in the indirect form of influence. 
The importance of this consideration, in respect to political 
freedom, has in general been quite sufficiently recognised, 
at least in England ; but many, in latter times, have been 
prone to think that limitation of the powers of the govern- 
ment is only essential when the government itself is badly 
constituted ; when it does not represent the people, but is 
the organ of a class, or coalition of classes : and that a gov- 
ernment of sufficiently popular constitution might be trust- 
ed with any amount of power over the nation, since its 
power would be only that of the nation over itself. This 
might be true, if the nation, in such cases, did not practi- 
cally mean a mere majority of the nation, and if minorities 
were only capable of oppressing, but not of being oppressed. 
Experience, however, proves that the depositaries of power 
who are mere delegates of the people, that is of a majority, 

* The only cases in which government agency involves nothing of a compul- 
sory nature, are the rare cases in which, without any artificial monopoly, it pays 
its own expenses. A bridge built with public money, on which tolls are collect- 
ed, sufficient to pay not only all current expenses, but the interest of the original 
outlay, is one case in point. The government railways in Belgium and Germany 
are another example. The Post Office, if its monopoly were abolished, and it 
still paid its expenses, would be another. 



LIMITS OF THE PROVINCE OF GOVERNMENT. 563 

are quite as ready (when they think they can count on pop- 
ular support) as any organs of oligarchy, to assume arbitrary 
power, and encroach unduly on the liberty of private life. 
The public collectively is abundantly ready to impose, not 
only its generally narrow views of its interests, but its ab- 
stract opinions, and even its tastes, as laws binding upon 
individuals. And the present civilization tends so strongly 
to make the power of persons acting in masses the only sub- 
stantial power in society, that there never was more neces- 
sity for surrounding individual independence of thought, 
speech, and conduct, with the most powerful defences, in 
order to maintain that originality of mind and individuality 
of character, which are the only source of any real progress, 
and of most of the qualities which make the human race 
much superior to any herd of animals. Hence it is no less 
important in a democratic than in any other government, 
that all tendency on the part of public authorities to stretch 
their interference, and assume a power of any sort which 
can easily be dispensed with, should be regarded with un- 
remitting jealousy. Perhaps this is even more important in 
a democracy than in any other form of political society ; be- 
cause, where public opinion is sovereign, an individual who 
is oppressed by the sovereign does not, as in most other 
states of things, find a rival power to which he can appeal 
for relief, or, at all events, for sympathy. 

§ 4. A third general objection to government agency, 
rests on the principle of the division of labour. Every ad- 
ditional function undertaken by the government, is a fresh 
occupation imposed upon a body already overcharged with 
duties. A natural consequence is that most things are ill 
done ; much not done at all, because the government is not 
able to do it without delays which are fatal to its purpose ; 
that the more troublesome, and less showy, of the functions 
undertaken, are postponed or neglected, and an excuse is 
always ready for the neglect ; while the heads of the ad- 
ministration have their minds so fully taken up with official 



564 BOOK V. CHAPTER XI. §4. 

details, in however perfunctory a manner superintended, 
that they have no time or thought to spare for the great in- 
terests of the state, and the preparation of enlarged meas- 
ures of social improvement. 

But these inconveniences, though real and serious, result 
much more from the bad organization of governments, than 
from the extent and variety of the duties undertaken by 
them. Government is not a name for some one functionary, 
or definite number of functionaries : there may be almost 
any amount of division of labour within the administrative 
body itself. The evil in question is felt in great magnitude 
under some of the governments of the Continent, where six 
or eight men, living at the capital and known by the name 
of ministers, demand that the whole public business of the 
country shall pass, or be supposed to pass, under their indi- 
vidual eye. But the inconvenience would be reduced to a 
very manageable compass, in a country in which there was 
a proper distribution of functions between the central and 
local officers of government, and in which the central body 
was divided into a sufficient number of departments. "When 
Parliament thought it expedient to confer on the govern- 
ment an inspecting and partially controlling authority over 
railways, it did not add railways to the department of the 
Home Minister, but created a Eailway Board. When it 
determined to have a central superintending authority for 
pauper administration, it established the Poor Law Com- 
mission. There are few countries in which a greater num- 
ber of functions are discharged by public officers, than in 
some states of the American Union, particularly the New 
England States : but the division of labour in public busi- 
ness is extreme ; most of these officers being not even ame- 
nable to any common superior, but performing their duties 
freely, under the double check of election by their townsmen, 
and civil as well as criminal responsibility to the tribunals. 

It is, no doubt, indispensable to good government that 
the chiefs of the administration, whether permanent or tem- 
porary, should extend a commanding, though general, view 



LIMITS OF THE PROVINCE OF GOVERNMENT. 565 

over the ensemble of all the interests confided, in any degree, 
to the responsibility of the central power. But with a skil- 
ful internal organization of the administrative machine, 
leaving to subordinates, and as far as possible to local sub- 
ordinates, not only the execution, but to a great degree the 
control, of details ; holding them accountable for the results 
of their acts rather than for the acts themselves, except 
where these come within the cognizance of the tribunals ; 
taking the most effectual securities for honest and capable 
appointments ; opening a broad path to promotion from the 
inferior degrees of the administrative scale to the superior ; 
leaving, at each step, to the functionary, a wider range in 
the origination of measures, so that, in the highest grade of 
all, deliberation might be concentrated on the great collec- 
tive interests of the country in each department ; if all this 
were done, the government would not probably be overbur- 
dened by any business, in other respects fit to be undertaken 
by it ; though the overburdening would remain as a serious 
addition to the inconveniences incurred by its undertaking 
any which was unfit. 

§ 5. But though a better organization of governments 
would greatly diminish the force of the objection to the 
mere multiplication of their duties, it would still remain 
true that in all the more advanced communities, the great 
majority of things are worse done by the intervention of 
government, than the individuals most interested in the 
matter would do them, or cause them to be done, if left to 
themselves. The grounds of this truth are expressed with 
tolerable exactness in the popular dictum, that people un- 
derstand their own business and their own interests better, 
and care for them more, than the government does, or can 
be expected to do. This maxim holds true throughout the 
greatest part of the business of life, and wherever it is true 
we ought to condemn every kind of government interven- 
tion that conflicts with it. The inferiority of government 
agency, for example, in any of the common operations of 



566 BOOK V. CHAPTER XI. §6. 

industry or commerce, is proved by the fact, that it is hard- 
ly ever able to maintain itself in equal competition with in- 
dividual agency, where the individuals possess the requisite 
degree of industrial enterprise, and can command the neces- 
sary assemblage of means. All the facilities which a gov- 
ernment enjoys of access to information ; all the means 
which it possesses of remunerating, and therefore of com- 
manding, the best available talent in the market — are not 
an equivalent for the one great disadvantage of an inferior 
interest in the result. 

It must be remembered, besides, that even if a govern- 
ment were superior in intelligence and knowledge to any 
single individual in the nation, it must be inferior to all the 
individuals of the nation taken together. It can neither 
possess in itself, nor enlist in its service, more than a portion 
of the acquirements and capacities which the country con- 
tains, applicable to any given purpose. There must be 
many persons equally qualified for the work with those 
whom the government employs, even if it selects its instru- 
ments with no reference to any consideration but their fit- 
ness. Now these are the very persons into whose hands, in 
the cases of most common occurrence, a system of individ- 
ual agency naturally tends to throw the work, because they 
are capable of doing it better or on cheaper terms than any 
other persons. So far as this is the case, it is evident that 
government, by excluding or even by superseding individ- 
ual agency, either substitutes a less qualified instrumentality 
for one better qualified, or at any rate substitutes its own 
mode of accomplishing the work, for all the variety of modes 
which would be tried by a number of equally qualified per- 
sons aiming at the same end ; a competition by many de- 
grees more propitious to the progress of improvement, than 
any uniformity of system. 

§ 6. I have reserved for the last place one of the strong- 
est of the reasons against the extension of government 
agency. Even if the government could comprehend within 



LIMITS OF THE PROVINCE OF GOVERNMENT. 567 

itself, in each department, all the most eminent intellectual 
capacity and active talent of the nation, it would not be the 
less desirable that the conduct of a large portion of the 
affairs of society should be left in the hands of the persons 
immediately interested in them. The business of life is an 
essential part of the practical education of a people ; with- 
out which, book and school instruction, though most neces- 
sary and salutary, does not suffice to qualify them for con- 
duct, and for the adaptation of means to ends. Instruction 
is only one of the desiderata of mental improvement ; an- 
other, almost as indispensable, is a vigorous exercise of the 
active energies ; labour, contrivance, judgment, self-con- 
trol : and the natural stimulus to these is the difficulties of 
life. This doctrine is not to be confounded with the com- 
placent optimism, which represents the evils of life as desir- 
able things, because they call forth qualities adapted to 
combat with evils. It is only because the difficulties exist, 
that the qualities which combat with them are of any value. 
As practical beings it is our business to free human life from 
as many as possible of its difficulties, and not to keep up a 
stock of them as hunters preserve game, for the exercise of 
pursuing it. But since the need of active talent and prac- 
tical judgment in the affairs of life can only be diminished, 
and not, even on the most favourable supposition, done 
away with, it is important that those endowments should be 
cultivated not merely in a select few, but in all, and that 
the cultivation should be more varied and complete than 
most persons are able to find in the narrow sphere of their 
merely individual interests. A people among whom there 
is no habit of spontaneous action for a collective interest — 
who look habitually to their government to command or 
prompt them in all matters of joint concern — who expect to 
have everything done for them, except what can be made 
an affair of mere habit and routine — have their faculties 
only half developed ; their education is defective in one of 
its most important branches. 

Not only is the cultivation of the active faculties by exer- 



568 BOOK V. CHAPTER XI. §6. 

cise, diffused through the whole community, in itself one 
of the most valuable of national possessions : it is rendered, 
not less, but more, necessary, when a high degree of that 
indispensable culture is systematically kept up in the chiefs 
and functionaries of the state. There cannot be a combina- 
tion of circumstances more dangerous to human welfare, 
than that in which intelligence and talent are maintained 
at a high standard within a governing corporation, but starved 
and discouraged outside the pale. Such a system, more 
completely than any other, embodies the idea of despotism, 
by arming with intellectual superiority as an additional 
weapon, those who have already the legal power. It ap- 
proaches as nearly as the organic difference between human 
beings and other animals admits, to the government of 
sheep by their shepherd, without anything like so strong an 
interest as the shepherd has in the thriving condition of the 
flock. The only security against political slavery, is the 
check maintained over governors, by the diffusion of intelli- 
gence, activity, and public spirit among the governed. Ex- 
perience proves the extreme difficulty of permanently keep- 
ing up a sufficiently high standard of those qualities ; a diffi- 
culty which increases, as the advance of civilization and 
security removes one after another of the hardships, embar- 
rassments, and dangers against which individuals had for- 
merly no resource but in their own strength, skill, and 
courage. It is therefore of supreme importance that all 
classes of the community down to the lowest, should have 
much to do for themselves ; that as great a demand should 
be made upon their intelligence and virtue as it is in any 
respect equal to ; that the government should not only leave 
as far as possible to their own faculties the conduct of what- 
ever concerns themselves alone, but should suffer them, or 
rather encourage them, to manage as many as possible of 
their joint concerns by voluntary co-operation ; since this 
discussion and management of collective interests is the 
great school of that public spirit, and the great source of 
that intelligence of public affairs, which are always regard- 



LIMITS OF THE PROVINCE OF GOVERNMENT. 569 

ed as the distinctive character of the public of free coun- 
tries. 

A democratic constitution, not supported by democratic 
institutions in detail, but confined to the central govern- 
ment, not only is not political freedom, but often creates a 
spirit precisely the reverse, carrying down to the lowest 
grade in society the desire and ambition of political domi- 
nation. In some countries the desire of the people is for not 
being tyrannized over, but in others it is merely for an 
equal chance to everybody of tyrannizing. Unhappily 
this last state of the desires is fully as natural to mankind 
as the former, and in many of the conditions even of civil- 
ized humanity, is far more largely exemplified. In propor- 
tion as the people are accustomed to manage their affairs 
by their own active intervention, instead of leaving them to 
the government, their desires will turn to repelling tyranny, 
rather than to tyrannizing : while in proportion as all real 
initiative and direction resides in the government, and indi- 
viduals habitually feel and act as under its perpetual tute- 
lage, popular institutions develope in them not the desire of 
freedom, but an unmeasured appetite for place and power ; 
diverting the intelligence and activity of the country from 
its principal business, to a wretched competition for the self- 
ish prizes and the petty vanities of office. 

§ 7. The preceding are the principal reasons, of a gen- 
eral character, in favour of restricting to the narrowest com- 
pass the intervention of a public authority in the business of 
the community : and few will dispute the more than suffi- 
ciency of these reasons, to throw, in every instance, the bur- 
den of making out a strong case, not on those who resist, but 
on those who recommend, government interference. Laisser- 
faire, in short, should be the general practice : every de- 
parture from it, unless required by some great good, is a 
certain evil. 

The degree in which the maxim, even in the cases to 
which it is most manifestly applicable, has heretofore been 



570 BOOK V. CHAPTER XI. §7. 

infringed by governments, future ages will probably have 
difficulty in crediting. Some idea may be formed of it from 
the description by M. Dunoyer* of the restraints imposed 
on the operations of manufacture under the old government 
of France, by the meddling and regulating spirit of legis- 
lation. 

" La societe exercait sur la fabrication la juridiction la 
plus illimitee et la plus arbitraire : elle disposait sans scru- 
pule des facultes des fabricants ; elle decidait qui pourrait 
travailler, quelle chose on pourrait faire, quels materiaux 
on devrait employer, quels procedes il faudrait suivre, 
quelles formes on donnerait aux produits, etc. II ne suffi- 
sait pas de faire bien, de faire mieux, il fallait faire suivant 
les regies. Qui ne connait ce reglement de 1670, qui pre- 
scrivait de saisir et de clouer au poteau, aves le nom des 
auteurs, les marchandises non conformes aux regies tracees, 
et qui, a la seconde recidive, voulait que les fabricants y 
fussent attaches eux-memes ? II ne s'agissait pas de con- 
suiter le gout des consommateurs, mais de se conformer aux 
volontes de la loi. Des legions d'inspecteurs, de commis- 
saires, de controleurs, de jures, de gardes, etaient charges 
de les faire executer ; on brisait les metiers, on brulait les 
produits qui n'y etaient pas conformes : les ameliorations 
etaient punies ; on mettait les inventeurs a l'amende. On 
soumettait a des regies differentes la fabrication des objets 
destines a la consommation interieure et celle des produits 
destines au commerce etranger. Un artisan n'etait pas le 
maitre de choisir le lieu de son etablissement, ni de travail- 
ler en toute saison, ni de travailler pour tout le monde. II 
existe un decret du 30 Mars 1700, qui borne a, dix-huit 
villes le nombre des lieux ou. l'on pourra faire de bas au 
metier ; un arret du 18 Juin 1723 enjoint aux fabricants de 
Kouen de suspendre leurs travaux du ler Juillet au 15 Sep- 
tembre, afin de faciliter ceux de la recolte ; Louis XIV., 
quand il voulut entreprendre la colonnade du Louvre, de- 
fendit aux particuliers d'employer des ouvriers sans sa per- 

* De la Liberte du Travail, voL ii. p. 353-4. 



LIMITS OF THE PROVINCE OF GOVERNMENT. 571 

mission, sous peine de 10,000 livres d'amende, et aux 
ouvriers de travailler pour les particuliers, sous peine, pour 
la premiere ibis, de la prison, et pour la seconde, des galores.'* 

That these and similar regulations were not a dead let 
ter, and that the officious and vexatious meddling was pro- 
longed down to the French Revolution, we have the testi- 
mony of Roland, the Girondist minister.* " I have seen," 
says he, " eighty, ninety, a hundred pieces of cotton or 
woollen stuff cut up, and completely destroyed. I have wit- 
nessed similar scenes every week for a number of years. I 
have seen manufactured goods confiscated ; heavy fines laid 
on the manufacturers ; some pieces of fabric were burnt in 
public places, and at the hours of market : others were fixed 
to the pillory, with the name of the manufacturer inscribed 
upon them, and he himself was threatened with the pillory, 
in case of a second offence. All this was done under my eyes, 
at Rouen, in conformity with existing regulations, or minis- 
terial orders. What crime deserved so cruel a punishment ? 
Some defects in the materials employed, or in the texture 
of the fabric, or even in some of the threads of the warp. 

" I have frequently seen manufacturers visited by a 
band of satellites who put all in confusion in their establish- 
ments, spread terror in their families, cut the stuffs from the 
frames, tore off the warp from the looms, and carried them 
away as proofs of infringement ; the manufacturers were 
summoned, tried, and condemned : their goods confiscated ; 
copies of their judgment of confiscation posted up in every 
public place ; fortune, reputation, credit, all was lost and 
destroyed. And for what offence? Because they had 
made of worsted, a kind of cloth called shag, such as the 
English used to manufacture, and even sell in France, while 
the French regulations stated that that kind of cloth should 
be made with mohair. I have seen other manufacturers 
treated in the same way, because they had made camlets of 



* I quote at second hand, from Mr. Carey's Essay on the Rate of Wages, 
pp. 195-6. 



572 BOOK V. CHAPTER XI. §7. 

a particular width, used in England and Germany, for which 
there was a great demand from Spain, Portugal, and other 
countries, and from several parts of France, while the 
French regulations prescribed other widths for camlets." 

The time is gone by, when such applications as these of 
the principle of " paternal government " would be attempt- 
ed, in even the least enlightened country of the European 
commonwealth of nations. In such cases as those cited, all 
the general objections to government interference are valid, 
and several of them in nearly their highest degree. But we 
must now turn to the second part of our task, and direct 
our attention to cases, in which some of those general objec- 
tions are altogether absent, while those which can never be 
got rid of entirely, are overruled by counter-considerations 
of still greater importance. 

We have observed that, as a general rule, the business 
of life is better performed when those who have an imme- 
diate interest in it are left to take their own course, uncon- 
trolled either by the mandate of the law or by the meddling 
of any public functionary. The persons, or some of the 
persons, who do the work, are likely to be better judges 
than the government, of the means of attaining the particu- 
lar end at which they aim. Were we to suppose, what is 
not very probable, that the government has possessed itself 
of the best knowledge which had been acquired up to a 
given time by the persons most skilled in the occupation ; 
even then, the individual agents have so much stronger and 
more direct an interest in the result, that the means are far 
more likely to be improved and perfected if left to their 
uncontrolled choice. But if the workman is generally the 
best selector of means, can it be affirmed with the same uni- 
versality, that the consumer, or person served, is the most 
competent judge of the end ? Is the buyer always qualified 
to judge of the commodity ? If not, the presumption in 
favour of the competition of the market does not apply to 
the case ; and if the commodity be one, in the quality of 
which society has much at stake, the balance of advantages 



LIMITS OF THE PROVINCE OF GOVERNMENT. 573 

may be in favour of some mode and degree of intervention, 
by the authorized representatives of the collective interest 
of the state. 

§ 8. Now, the proposition that the consumer is a com- 
petent judge of the commodity, can be admitted only with 
numerous abatements and exceptions. He is generally the 
best judge (though even this is not true universally) of the 
material objects produced for his use. These are destined 
to supply some physical want, or gratify some taste or in- 
clination, respecting which wants or inclinations there is no 
appeal from the person who feels them ; or they are the 
means and appliances of some occupation, for the use of the 
persons engaged in it, who may be presumed to be judges 
of the things required in their own habitual employment. 
But there are other things of the worth of which the de- 
mand of the market is by no means a test ; things of which 
the utility does not consist in ministering to inclinations, 
nor in serving the daily uses of life, and the want of which 
is least felt where the need is greatest. This is peculiarly 
true of those things which are chiefly useful as tending to 
raise the character of human beings. The uncultivated can- 
not be competent judges of cultivation. Those who most 
need to be made wiser and better, usually desire it least, 
and if they desired it, would be incapable of finding the 
way to it by their own lights. It will continually happen, 
on the voluntary system, that, the end not being desired, 
the means will not be provided at all, or that, the persons re- 
quiring improvement having an imperfect or altogether er- 
roneous conception of what they want, the supply called 
forth by the demand of the market will be anything but what 
is really required. Now any well-intentioned and tolerably 
civilized government may think without presumption that 
it does or ought to possess a degree of cultivation above the 
average of the community which it rules, and that it should 
therefore be capable of offering better education and better 
instruction to the people, than the greater number of them 



574 BOOK V. CHAPTER XI. §8. 

would spontaneously demand. Education, therefore, is one 
of those things which it is admissible in principle that a 
government should provide for the people. The case is one 
to which the reasons of the non-interference principle do not 
necessarily or universally extend.* 

With regard to elementary education, the exception to 
ordinary rules may, I conceive, justifiably be carried still 
further. There are certain primary elements and means of 
knowledge, which it is in the highest degree desirable that 
all human beings born into the community should acquire 
during childhood. If their parents, or those on whom they 
depend, have the power of obtaining for them this instruc- 



* In opposition to these opinions, a writer, with whom on many points I 
agree, but whose hostility to government intervention seems to me too indis- 
criminate and unqualified, M. Dunoyer, observes, that instruction, however good 
in itself, can only be useful to the public in so far as they are willing to receive 
it, and that the best proof that the instruction is suitable to their wants, is its 
success as a pecuniary enterprise. This argument seems no more conclusive re- 
specting instruction for the mind, than it would be respecting medicine for the 
body. No medicine will do the patient any good if he cannot be induced to 
take it ; but we are not bound to admit as a corollary from this, that the patient 
will select the right medicine without assistance. Is it not possible that a recom- 
mendation, from any quarter which he respects, may induce him to accept a bet- 
ter medicine than he would spontaneously have chosen ? This is, in respect to 
education, the very point in debate. Without doubt, instruction which is so far 
in advance of the people that they cannot be induced to avail themselves of it, is 
to them of no more worth than if it did not exist. But between what they spon- 
taneously choose, and what they will refuse to accept when offered, there is a 
breadth of interval proportioned to their deference for the recommender. Be- 
sides, a thing of which the public are bad judges, may be required to be shown 
to them and pressed on their attention for a long time, and to prove its advan- 
tages by long experience, before they learn to appreciate it, yet they may learn 
at last ; which they might never have done, if the thing had not been thus ob- 
truded upon them in act, but only recommended in theory. Now, a pecuniary 
speculation cannot wait years, or perhaps generations, for success ; it must suc- 
ceed rapidly, or not at all. Another consideration which M. Dunoyer seems to 
have overlooked, is, that institutions and modes of tuition which never could be 
made sufficiently popular to repay, with a profit, the expenses incurred on them, 
may be invaluable to the many by giving the highest quality of education to the 
few, and keeping up the perpetual succession of superior minds, by whom 
knowledge is advanced, and the community urged forward in civilization. 



LIMITS OF THE PROVINCE OF GOVERNMENT. 575 

tion, and fail to do it, they commit a double breach of duty : 
towards the children themselves, and towards the members 
of the community generally, who are all liable to suffer 
seriously from the consequences of ignorance and want of 
education in their fellow-citizens. It is therefore an allow- 
able exercise of the powers of government, to impose on 
parents the legal obligation of giving elementary instruction 
to children. This however cannot fairly be done, without 
taking measures to ensure that such instruction shall be al- 
ways accessible to them, either gratuitously or at a trifling 
expense. 

It may indeed be objected that the education of children 
is one of those expenses which parents, even of the labour- 
ing class, ought to defray ; that it is desirable that they 
should feel it incumbent on them to provide by their own 
means for the fulfilment of their duties, and that by giving 
education at the cost of others, just as much as by giving 
subsistence, the standard of necessary wages is proportion- 
ally lowered, and the springs of exertion and self-restraint 
in so much relaxed. This argument could, at best, be only 
valid if the question were that of substituting a public pro- 
vision for what individuals would otherwise do for them- 
selves ; if all parents in the labouring class recognised and 
practised the duty of giving instruction to their children at 
their own expense. But inasmuch as parents do not prac- 
tise this duty, and do not include education among those 
necessary expenses which their wages must provide for, 
therefore the general rate of wages is not high enough to 
bear those expenses, and they must be borne from some 
other source. And this is not one of the cases in which the 
tender of help perpetuates the state of things which renders 
help necessary. Instruction, when it is really such, does 
not enervate, but strengthens as well as enlarges the active 
faculties : in whatever manner acquired, its effect on the 
mind is favourable to the spirit of independence : and when, 
unless had gratuitously, it would not be had at all, help in 
this form has the opposite tendency to that w T hich in so 



576 BOOK V. CHAPTER XI. §8. 

many other cases makes it objectionable ; it is help towards 
doing without help. 

In England, and most European countries, elementary 
instruction cannot be paid for, at its full cost, from the com- 
mon wages of unskilled labour, and would not if it could. 
The alternative therefore is not between government and 
private speculation, but between a government provision 
and voluntary charity : between interference by govern- 
ment, and interference by associations of individuals, sub- 
scribing their own money for the purpose, like the two 
great School Societies. It is, of course, not desirable that 
anything should be done by funds derived from compulsory 
taxation, which is already sufficiently well done by individ- 
ual liberality. How far this is the case with school instruc- 
tion, is, in each particular instance, a question of fact. The 
education provided in this country on the voluntary prin- 
ciple has of late been so much discussed, that it is needless 
in this place to criticise it minutely, and I shall merely 
express my conviction, that even in quantity it is, and is 
likely to remain, altogether insufficient, while in quality, 
though with some slight tendency to improvement, it is 
never good except by some rare accident, and generally so 
bad as to be little more than nominal. I hold it therefore 
the duty of the government to supply the defect by giving 
pecuniary support to elementary schools, such as to render 
them accessible to all the children of the poor, either freely, 
or for a payment too inconsiderable to be sensibly felt. 

One thing must be strenuously insisted on ; that the 
government must claim no monopoly for its education, 
either in the lower or in the higher branches ; must exert 
neither authority nor influence to induce the people to re- 
sort to its teachers in preference to others, and must confer 
no peculiar advantages on those who have been instructed 
by them. Though the government teachers will probably 
be superior to the average of private instructors, they will 
not embody all the knowledge and sagacity to be found in 
all instructors taken together, and it is desirable to leave 



LIMITS OF THE PROVINCE OF GOVERNMENT. 577 

open as many roads as possible to the desired end. It is not 
endurable that a government should, either de jure or de 
facto, have a complete control over the education of the 
people. To possess such a control, and actually exert it, is 
to be despotic. A government which can mould the opin- 
ions and sentiments of the people from their youth upwards, 
can do with them whatever it pleases. Though a govern- 
ment, therefore, may, and in many cases ought to, establish 
schools and colleges, it must neither compel nor bribe any 
person to come to them ; nor ought the power of individ- 
uals to set up rival establishments, to depend in any degree 
upon its authorization. It would be justified in requiring 
from all the people that they shall possess instruction in 
certain things, but not in prescribing to them how or from 
whom they shall obtain it. 

§ 9. In the matter of education, the intervention of 
government is justifiable, because the case is not one in 
which the interest and judgment of the consumer are a 
sufficient security for the goodness of the commodity. Let 
us now consider another class of cases, where there is no 
person in the situation of a consumer, and where the inter- 
est and judgment to be relied on are those of the agent 
himself ; as in the conduct of any business in which he is 
exclusively interested, or in entering into any contract or 
engagement by which he himself is to be bound. 

The ground of the practical principle of non-interference 
must here be, that most persons take a juster'and more in- 
telligent view of their own interest, and of the means of 
promoting it, than can either be prescribed to them by a 
general enactment of the legislature, or pointed out in the 
particular case by a public functionary. The maxim is 
unquestionably sound as a general rule ; but there is no 
difficulty in perceiving some very large and conspicuous ex- 
ceptions to it. These may be classed under several heads. 

First : — The individual who is presumed to be the best 
judge of his own interests may be incapable of judging or 
76 



57S BOOK V. CHAPTER XT. §9. 

acting for himself ; may be a lunatic, an idiot, an infant : 
or though not wholly incapable, may be of immature years 
and judgment. In this case the foundation of the laisser- 
faire principle breaks down entirely. The person most in- 
terested is not the best judge of the matter, nor a competent 
judge at all. Insane persons are everywhere regarded as 
proper objects of the care of the state.* In the case of chil- 
dren and young persons, it is common to say, that though 
they cannot judge for themselves, they have their parents 
or other relatives to judge for them. But this removes the 
question into a different category ; making it no longer a 
question whether the government should interfere with in- 
dividuals in the direction of their own conduct and interests, 
but whether it should leave absolutely in their power the 
conduct and interests of somebody else. Parental power is 
as susceptible of abuse as any other power, and is, as a mat- 
ter of fact, constantly abused. If laws do not succeed in 
preventing parents from brutally ill-treating, and even from 
murdering their children, far less ought it to be presumed 

* The practice of the English law with respect to insane persons, especially 
on the all-important point of the ascertainment of insanity, most urgently de- 
mands reform. At present no persons, whose property is worth coveting, and 
whose nearest relations are unscrupulous, or on bad terms with them, are secure 
against a commission of lunacy. At the instance of the persons who would 
profit by their being declared insane, a jury may be impanelled and an investiga- 
tion held at the expense of the property, in which all their personal peculiarities, 
with all the additions made by the lying gossip of low servants, are poured into 
the credulous ears of twelve petty shopkeepers, ignorant of all ways of life ex- 
cept those of their own class, and regarding every trait of individuality in charac- 
ter or taste as eccentricity, and all eccentricity as either insanity or wickedness. 
If this sapient tribunal gives the desired verdict, the property is handed over to 
perhaps the last persons whom the rightful owner would have desired or suffered 
to possess it. Some recent instances of this kind of investigation have been a 
scandal to the administration of justice. Whatever other changes in this branch 
of law may be made, two at least are imperative : first, that, as in other legal 
proceedings, the expenses should not be borne by the person on trial, but by the 
promoters of the inquiry, subject to recovery of costs in case of success : and 
secondly, that the property of a person declared insane, should in no case be 
made over to heirs while the proprietor is alive, but should be managed by a 
public officer until his death or recovery. 



LIMITS OF THE PROVINCE OF GOVERNMENT. 579 

that the interests of children will never be sacrificed, in 
more common-place and less revolting "ways, to the selfish- 
ness or the ignorance of their parents. Whatever it can be 
clearly seen that parents ought to do or forbear for the in- 
terest of children, the law is warranted, if it is able, in 
compelling to be done or forborne, and is generally bound 
to do so. To take an example from the peculiar province 
of political economy ; it is right that children, and young 
persons not yet arrived at maturity, should be protected, so 
far as the eye and hand of the state can reach, from being 
over-worked. Labouring for too many hours in the day, or 
on work beyond their strength, should not be permitted to 
them, for if permitted it may always be compelled. Free- 
dom of contract, in the case of children, is but another word 
for freedom of coercion. Education also, the best which 
circumstances admit of their receiving, is not a thing which 
parents or relatives, from indifference, jealousy, or avarice, 
should have it in their power to withhold. 

The reasons for legal intervention in favour of children, 
apply not less strongly to the case of those unfortunate 
slaves and victims of the most brutal part of mankind, the 
lower animals. It is by the grossest misunderstanding of 
the principles of liberty, that the infliction of exemplary 
punishment on ruffianism practised towards these defenceless 
creatures, has been treated as a meddling by government 
with things beyond its province ; an interference with do- 
mestic life. The domestic life of domestic tyrants is one of 
the things which it is the most imperative on the law to in- 
terfere with ; and it is to be regretted that metaphysical 
scruples respecting the nature and source of the authority 
of government, should induce many warm supporters of 
laws against cruelty to animals, to seek for a justification of 
such laws in the incidental consequences of the indulgence 
of ferocious habits, to the. interests of human beings, rather 
than in the intrinsic merits of the case itself. What it 
would be the duty of a human being, possessed of the requi- 
site physical strength, to prevent by force if attempted in his 



580 BOOK V. CHAPTER XI. §9. 

presence, it cannot be less incumbent on society generally 
to repress. The existing laws of England on the subject are 
chiefly defective in the trifling, often almost nominal, maxi- 
mum, to which the penalty even in the worst cases is limited. 
Among those members of the community whose freedom 
of contract ought to be controlled by the legislature for 
their own protection, on account (it is said) of their depend- 
ent position, it is frequently proposed to include women : 
and in the existing Factory Act, their labour, in common 
with that of young persons, has been placed under peculiar 
restrictions. But the classing together, for this and other 
purposes, of women and children, appears to me both inde- 
fensible in principle and mischievous in practice. Children 
below a certain age cannot judge or act for themselves ; up 
to a considerably greater age they are inevitably more or 
less disqualified for doing so ; but women are as capable as 
men of appreciating and managing their own concerns, and 
the only hindrance to their doing so arises from the injustice 
of their present social position. So long as the law makes 
everything which the wife acquires, the property of the hus- 
band, while by compelling her to live with him it forces 
her to submit to almost any amount of moral and even 
physical tyranny which he may choose to inflict, there is 
some ground for regarding every act done by her as done 
under coercion : but it is the great error of reformers and 
philanthropists in our time, to nibble at the consequences 
of unjust power instead of redressing the injustice itself. 
If women had as absolute a control as men have, over their 
own persons and their own patrimony or acquisitions, there 
would be no plea for limiting their hours of labouring for 
themselves, in order that they might have time to labour 
for the husband, in what is called, by the advocates of re- 
striction, his home. Women employed in factories are the 
only women in the labouring rank of life whose position is 
not that of slaves and drudges ; precisely because they can- 
not easily be compelled to work and earn wages in factories 
against their will. For improving the condition of women, 



LIMITS OF THE PROVINCE OF GOVERNMENT. 581 

it should, on the contrary, be an object to give them the 
readiest access to independent industrial employment, in- 
stead of closing, either entirely or partially, that which is 
already open to them. 

§ 10. A second exception to the doctrine that individ- 
uals are the best judges of their own interest, is when an 
individual attempts to decide irrevocably now, what will be 
best for his interest at some future and distant time. The 
presumption in favour of individual judgment is only legiti- 
mate, where the judgment is grounded on actual, and es- 
pecially on present, personal experience ; not w T here it is 
formed antecedently to experience, and not suffered to be 
reversed even after experience has condemned it. "When 
persons have bound themselves by a contract, not simply to 
do some one thing, but to continue doing something for 
ever or for a prolonged period, without any power of revok- 
ing the engagement, the presumption which their perse- 
verance in that course of conduct would otherwise raise in 
favour of its being advantageous to them, does not exist ; 
and any such presumption which can be grounded on their 
having voluntarily entered into the contract, perhaps at an 
early age, and without any real knowledge of what they 
undertook, is commonly next to null. The practical maxim 
of leaving contracts free, is not applicable without great 
limitations in case of engagements in perpetuity ; and the 
law should be extremely jealous of such engagements ; 
should refuse its sanction to them, when the obligations they 
impose are such as the contracting party cannot be a com- 
petent judge of; if it ever does sanction them, it should 
take every possible security for their being contracted with 
foresight and deliberation ; and in compensation for not 
permitting the parties themselves to revoke their engage- 
ment, should grant them a release from it, on a sufficient 
case being made out before an impartial authority. These 
considerations are eminently applicable to marriage, the 
most important of all cases of engagement for life. 



582 BOOK V. CHAPTER XI. §11. 

§ 11. The third exception which I shall notice, to the 
doctrine that government cannot manage the affairs of indi- 
viduals as well as the individuals themselves, has reference 
to the great class of cases in which the individuals can only 
manage the concern by delegated agency, and in which the 
so-called private management is, in point of fact, hardly 
better entitled to be called management by the persons in- 
terested, than administration by a public officer. "Whatever, 
if left to spontaneous agency, can only be done by joint- 
stock associations, will often be as well, and sometimes bet- 
ter done, as far as the actual work is concerned, by the 
state. Government management is, indeed, proverbially 
jobbing, careless, and ineffective, but so likewise has gen- 
erally been joint-stock management. The directors of a 
joint-stock company, it is true, are always shareholders ; 
but also the members of a government are invariably tax- 
payers ; and in the case of directors, no more than in that 
of governments, is their proportional share of the benefits 
of good management, equal to the interest they may pos- 
sibly have in mismanagement, even without reckoning the 
interest of their ease. It may be objected, that the share- 
holders, in their collective character, exercise a certain con- 
trol over the directors, and have almost always full power 
to remove them from office. Practically, however, the diffi- 
culty of exercising this power is found to be so great, that it 
is hardly ever exercised except in cases of such flagrantly 
unskilful, or, at least, unsuccessful management, as would 
generally produce the ejection from office of managers ap- 
pointed by the government. Against the very ineffectual 
security afforded by meetings of shareholders, and by their 
individual inspection and enquiries, may be placed the 
greater publicity and more active discussion and comment, 
to be expected in free countries with regard to affairs in 
which the general government takes part. The defects, 
therefore, of government management, do not seem to be 
necessarily much greater, if necessarily greater at all, than 
those of management by joint-stock. 



LIMITS OF THE PROVINCE OP GOVERNMENT. 583 

The true reasons in favour of leaving to voluntary associ- 
ations all such things as they are competent to perform, 
would exist in equal strength if it were certain that the 
work itself would be as well or better done by public offi- 
cers. These reasons have been already pointed out : the 
mischief of overloading the chief functionaries of govern- 
ment with demands on their attention, and diverting them 
from duties which they alone can discharge, to objects 
which can be sufficiently well attained without them ; the 
danger of unnecessarily swelling the direct power and indi- 
rect influence of government, and multiplying occasions of 
collision between its agents and private citizens ; and the 
inexpediency of concentrating in a dominant bureaucracy, 
all the skill and experience in the management of large in- 
terests, and all the power of organized action, existing in 
the community ; a practice which keeps the citizens in a 
relation to the government like that of children to their 
guardians, and is a main cause of the inferior capacity for 
political life which has hitherto characterized the over-gov- 
erned countries of the Continent, whether with or without 
the forms of representative government.* 

But although, for these reasons, most things which are 
likely to be even tolerably done by voluntary associations, 
should, generally speaking, be left to them ; it does not fol- 
low that the manner in which those associations perform 
their work should be entirely uncontrolled by the govern- 

*" A parallel case may be found in the distaste for politics, and absence of 
public spirit, by which women, as a class, are characterized in the present state 
of society, and which is often felt and complained of by political reformers, with- 
out, in general, making them willing to recognise, or desirous to remove, its 
cause. It obviously arises from their being taught, both by institutions and by 
the whole of their education, to regard themselves as entirely apart from politics. 
Wherever they have been politicians, they have shown as great interest in the 
subject, and as great aptitude for it, according to the spirit of their time, as the 
men with whom they were cotemporaries : in that period of history (for example) 
in which Isabella of Castile and Elizabeth of England were, not rare exceptions, 
but merely brilliant examples of a spirit and capacity very largely diffused 
among women of high station and cultivation in Europe. 



584 BO0K v - CHAPTER XI. §11. 

ment. There are many cases in which the agency, of what- 
ever nature, by which a service is performed, is certain, from 
the nature of the case, to be virtually single ; in which a 
practical monopoly, with all the power it confers of taxing 
the community, cannot be prevented from existing. I have 
already more than once adverted to the case of the gas and 
water companies, among which, though perfect freedom is 
allowed to competition, none really takes place, and practi- 
cally they are found to be even more irresponsible, and un- 
approachable by individual complaints, than the govern- 
ment. There are the expenses without the advantages 
of plurality of agency ; and the charge made for services 
which cannot be dispensed with, is, in substance, quite as 
much compulsory taxation as if imposed by law : there are 
few householders who make any distinction between their 
" water rate " and their other local taxes. In the case of 
these particular services, the reasons preponderate in favour 
of their being performed, like the paving and cleansing of 
the streets, not certainly by the general government of the 
state, but by the municipal authorities of the town, and the 
expense defrayed, as even now it in fact is, by a local rate. 
But in the many analogous causes which it is best to resign 
to voluntary agency, the community needs some other se- 
curity for the fit performance of the service than the inter- 
est of the managers ; and it is the part of government, 
either to subject the business to reasonable conditions for 
the general advantage, or to retain such power over it, that 
the profits of the monopoly may at least be obtained for the 
public. This applies to the case of a road, a canal, or a 
railway. These are always, in a great degree, practical 
monopolies ; and a government which concedes such mono- 
poly unreservedly to a private company, does much the 
same thing as if it allowed an individual or an association 
to levy any tax they chose, for their own benefit, on all the 
malt produced in the country, or on all the cotton imported 
into it. To make the concession for a limited time is gen- 
erally justifiable, on the principle which justifies patents for 



LIMITS OF THE PROVINCE OF GOVERNMENT. 585 

inventions : but the state should either reserve to itself a 
reversionary property in such public works, or should re- 
tain, and freely exercise, the right of fixing a maximum of 
fares and charges, and, from time to time, varying that max- 
imum. It is perhaps necessary to remark that the state 
may be the proprietor of canals or railways without itself 
working them ; and that they will almost always be better 
worked by means of a company, renting the railway or 
canal for a limited period from the state. 

§ 12. To a fourth cause of exception I must request 
particular attention, it being one to which, as it appears to 
me, the attention of political economists has not yet been 
sufficiently drawn. There are matters in which the inter- 
ference of law is required, not to overrule the judgment of 
individuals respecting their own interest, but to give effect 
to that judgment ; they being unable to give effect to it ex- 
cept by concert, which concert again cannot be effectual 
unless it receives validity and sanction from the law. For 
illustration, and without prejudging the particular point, I 
may advert to the question of diminishing the hours of la- 
bour. Let us suppose, what is at least supposable, whether 
it be the fact or not — that a general reduction of the hours 
of factory labour, say from ten to nine, would be for the ad- 
vantage of the workpeople : that they would receive as high 
wages, or nearly as high, for nine hours labour as they re- 
ceive for ten. If this would be the result, and if the opera- 
tives generally are convinced that it would, the limitation, 
some may say, will be adopted spontaneously. I answer, 
that it will not be adopted unless the body of operatives 
bind themselves to one another to abide by it. A work- 
man who refused to work more than nine hours while there 
were others who worked ten, would either not be employed 
at all, or if employed, must submit to lose one-tenth of his 
wages. However convinced, therefore, he may be that it 
is the interest of the class to work short time, it is contrary 
to his own interest to set the example, unless he is well as- 



586 BOOK V. CHAPTER XI. §12. 

sured that all or most others will follow it. But suppose a 
general agreement of the whole class : might not this be 
effectual without the sanction of law ? Not unless enforced by 
opinion with a rigour practically equal to that of law. For 
however beneficial the observance of the regulation might 
be to the class collectively, the immediate interest of every 
individual would lie in violating it : and the more numerous 
those were who adhered to the rule, the more would indi- 
viduals gain by departing from it. If nearly all restricted 
themselves to nine hours, those who chose to work for ten 
would gain all the advantage of the restriction, together 
with the profit of infringing it ; they would get ten hours 
wages for nine hours work, and an hour's wages besides. I 
grant that if a large majority adhered to the nine hours, 
there would be no harm done : the benefit would be, in the 
main, secured to the class, while those individuals who pre- 
ferred to work harder and earn more, would have an oppor- 
tunity of doing so. This certainly would be the state of 
things to be wished for ; and assuming that a reduction of 
hours without any diminution of wages could take place 
without expelling the commodity from some of its markets 
— which is in every particular instance a question of fact, 
not of principle — the manner in which it would be most 
desirable that this effect should be brought about, would be 
by a quiet change in the general custom of the trade ; short 
hours becoming, by spontaneous choice, the general prac- 
tice, but those who chose to deviate from it having the full- 
est liberty to do so. Probably, however, so many would 
prefer the ten hours work on the improved terms, that the 
limitation could not be maintained as a general practice : 
what some did from choice, others would soon be obliged 
to do from necessity, and those who had chosen long hours 
for the sake of increased wages, would be forced in the end 
to work long hours for no greater wages than before. As- 
suming then that it really would be the interest of each to 
work only nine hours if he could be assured that all others 
would do the same, there might be no means of their attain- 



LIMITS OF THE PROVINCE OF GOVERNMENT. 537 

ing this object but by converting their supposed mutual 
agreement into an engagement under penalty, by consent- 
ing to have it enforced by law. I am not expressing any 
opinion in favour of such an enactment, which has never 
been demanded, and which I certainly should not, in pres- 
ent circumstances, recommend : but it serves to exemplify 
the manner in which classes of persons may need the assist- 
ance of law, to give effect to their deliberate collective opin- 
ion of their own interest, by affording to every individual a 
guarantee that his competitors will pursue the same course, 
without which he cannot safely adopt it himself. 

Another exemplification of the same principle is afforded 
by what is known as the Wakefield system of colonization. 
This system is grounded on the important principle, that 
the degree of productiveness of land and labour depends on 
their being in a due proportion to one another ; that if a 
few persons in a newly-settled country attempt to occupy 
and appropriate a large district, or if each labourer becomes 
too soon an occupier and cultivator of land, there is a loss 
of productive power, and a great retardation of the progress 
of the colony in wealth and civilization : that nevertheless 
the instinct (as it may almost be called) of appropriation, 
and the feelings associated in old countries with landed pro- 
prietorship, induce almost every emigrant to take possession 
of as much land as he has the means of acquiring, and every 
labourer to become at once a proprietor, cultivating his own 
land with no other aid than that of his family. If this pro- 
pensity to the immediate possession of land could be in some 
degree restrained, and each labourer induced to work a cer- 
tain number of years on hire before he became a landed 
proprietor, a perpetual stock of hired labourers could be 
maintained, available for roads, canals, works of irrigation, 
&c, and for the establishment and carrying on of the differ- 
ent branches of town industry ; whereby the labourer, when 
he did at last become a landed proprietor, would find his 
land much more valuable, through access to markets, and 
facility of obtaining hired labour. Mr. Wakefield therefore 



588 BOOK V. CHAPTER XI. §12. 

proposed to check the premature occupation of land, and 
dispersion of the people, by putting upon all unappropriated 
lands a rather high price, the proceeds of which were to be 
expended in conveying emigrant labourers from the mother 
country. 

This salutary provision, however, has been objected to, 
in the name and on the authority of what was represented 
as the great principle of political economy, that individuals 
are the best judges of their own interest. It was said, that 
when things are left to themselves, land is appropriated and 
occupied by the spontaneous choice of individuals, in the 
quantities and at the times most advantageous to each per- 
son, and therefore to the community generally ; and that to 
interpose artificial obstacles to their obtaining land, is to 
prevent them from adopting the course which in their own 
judgment is most beneficial to them, from a self-conceited 
notion of the legislator, that he knows what is most for their 
interest, better than they do themselves. Now this is a 
complete misunderstanding, either of the system itself, or of 
the principle with which it is alleged to conflict. The over- 
sight is similar to that which we have just seen exemplified 
on the subject of hours of labour. However beneficial it 
might be to the colony in the aggregate, and to each indi- 
vidual composing it, that no one should occupy more land 
than he can properly cultivate, nor become a proprietor 
until there are other labourers ready to take his place in 
working for hire ; it can never be the interest of an individ- 
ual to exercise this forbearance, unless he is assured that 
others will do so too. Surrounded by settlers who have 
each their thousand acres, how is he benefited by restricting 
himself to fifty ? or what does a labourer gain by deferring 
the acquisition altogether for a few years, if all other labourers 
rush to convert their first earnings into estates in the wilder- 
ness, several miles apart from one another? If they, bj 
seizing on land, prevent the formation of a class of labourers 
for wages, he will not, by postponing the time of his be- 
coming a proprietor, be enabled to employ the land with 



LIMITS OF THE PROVINCE OF GOVERNMENT. 589 

any greater advantage when he does obtain it ; to what end 
therefore should he place himself in what will appear to him 
and others a position of inferiority, by remaining a hired 
labourer when all around him are proprietors? It is the 
interest of each to do what is good for all, but only if others 
will do likewise. 

The principle that each is the best judge of his own in- 
terest, understood as these objectors understand it, would 
prove that governments ought not to fulfil any of their 
acknowledged duties — ought not, in fact, to exist at all. It 
is greatly the interest of the community, collectively and 
individually, not to rob or defraud one another : but there 
is not the less necessity for laws to punish robbery and 
fraud ; because, though it is the interest of each that nobody 
should rob or cheat, it is not any one's interest to refrain 
from robbing and cheating others when all others are per- 
mitted to rob and cheat him. Penal laws exist at all, 
chiefly for this reason, because even an unanimous opinion 
that a certain line of conduct is for the general interest, does 
not always make it people's individual interest to adhere to 
that line of conduct. 

§ 13. Fifthly ; the argument against government inter- 
ference grounded on the maxim that individuals are the 
best judges of their own interest, cannot apply to the very 
large class of cases, in which those acts of individuals with 
which the government claims to interfere, are not done by 
those individuals for their own interest, but for the interest 
of other people. This includes, among other things, the 
important and much agitated subject of public charity. 
Though individuals should, in general, be left to do fof 
themselves whatever it can reasonably be expected that they 
should be capable of doing, yet when they are at any rate 
not to be left to themselves, but to be helped by other 
people, the question arises whether it is better that they 
should receive this help exclusively from individuals, and 
therefore uncertainly and casually, or by systematic ar- 



590 BOOK V. CHAPTER XT. §13. 

rangements, in which society acts through its organ, the 
state. 

This brings us to the subject of Poor Laws ; a subject 
which would be of very minor importance if the habits of 
all classes of the people were temperate and prudent, and the 
diffusion of property satisfactory ; but of the greatest mo- 
ment in a state of things so much the reverse of this, in both 
points, as that which the British islands present. 

Apart from any metaphysical considerations respecting 
the foundation of morals or of the social union, it will be 
admitted to be right that human beings should help one an- 
other ; and the more so, in proportion to the urgency of the 
need : and none needs help so urgently as one who is starv- 
ing. The claim to help, therefore, created by destitution, 
is one of the strongest which can exist ; and there is prima 
facie the amplest reason for making the relief of so extreme 
an exigency as certain to those who require it, as by any 
arrangements of society it can be made. 

On the other hand, in all cases of helping, there are two 
sets of consequences to be considered ; the consequences of 
the assistance itself, and the consequences of relying on the 
assistance. The former are generally beneficial, but the 
latter, for the most part, injurious ; so much so, in many 
cases, as greatly to outweigh the value of the benefit. And 
this is never more likely to happen than in the very cases 
where the need of help is the most intense. There are few 
things for which it is more mischievous that people should 
rely on the habitual aid of others, than for the means of sub- 
sistence, and unhappily there is no lesson which they more 
easily learn. The problem to be solved is therefore one of 
peculiar nicety as well as importance ; how to give the 
greatest amount of needful help, with the smallest encour- 
agement to undue reliance on it. 

Energy and self-dependence are, however, liable to be 
impaired by the absence of help, as well as by its excess 
It is even more fatal to exertion to have no hope of succeed=- 
ing by it, than to be assured of succeeding without it. When 



LIMITS OF THE PROVINCE OF GOVERNMENT. 591 

the condition of any one is so disastrous that his energies are 
paralyzed by discouragement, assistance is a tonic, not a 
sedative : it braces instead of deadening the active faculties : 
always provided that the assistance is not such as to dispense 
with self-help, by substituting itself for the person's own 
labour, skill, and prudence, but is limited to affording him a 
better hope of attaining success by those legitimate means. 
This accordingly is a test to which all plans of philanthropy 
and benevolence should be brought, whether intended for 
the benefit of individuals or of classes, and whether con- 
ducted on the voluntary or on the government principle. 

In so far as the subject admits of any general doctrine 
or maxim, it would appear to be this — that if assistance is 
given in such a manner that the condition of the person 
helped is as desirable as that of the person who succeeds 
in doing the same thing without help, the assistance, if ca- 
pable of being previously calculated on, is mischievous ; but 
if, while available to everybody, it leaves to every one a 
strong motive to do without it if he can, it is then for the 
most part beneficial. This principle, applied to a system 
of public charity, is that of the Poor Law of 1834. If the 
condition of a person receiving relief is made as eligible as 
that of the labourer who supports himself by his own exer- 
tions, the system strikes at the root of all individual industry 
and self-government ; and, if fully acted up to, would re- 
quire as its supplement an organized system of compulsion, 
for governing and setting to work like cattle, those who had 
been removed from the influence of the motives that act on 
human beings. But if, consistently with guaranteeing all 
persons against absolute want, the condition of those who 
are supported by legal charity can be kept considerably 
less desirable than the condition of those who find support 
for themselves, none but beneficial consequences can arise 
from a law which renders it impossible for any person, ex- 
cept by his own choice, to die from insufficiency of food. 
That in England at least this supposition can be realized, 
is proved by the experience of a long period preceding the 



592 B00K v - CHAPTER XI. §13. 

close of the last century, as well as by that of many highly 
pauperized districts in more recent times, which have been 
dispauperized by adopting strict rules of poor-law adminis- 
tration, to the great and permanent benefit of the whole 
labouring class. There is probably no country in which, by 
varying the means suitably to the character of the people, a 
legal provision for the destitute might not be made compat- 
ible with the observance of the conditions necessary to its 
being innocuous. 

Subject to these conditions, I conceive it to be highly 
desirable, that the certainty of subsistence should be held 
out by law to the destitute able-bodied, rather than that 
their relief should depend on voluntary charity. In the first 
place, charity almost always does too much or too little ; it 
lavishes its bounty in one place, and leaves people to starve 
in another. Secondly, since the state must necessarily pro- 
vide subsistence for the criminal poor while undergoing 
punishment, not to do the same for the poor who have not 
offended is to give a premium on crime. And lastly, if the 
poor are left to individual charity, a vast amount of men- 
dicity is inevitable. What the state may and should aban- 
don to private charity, is the task of distinguishing between 
one case of real necessity and another. Private charity can 
give more to the more deserving. The state must act by 
general rules. It cannot undertake to discriminate between 
the deserving and the undeserving indigent. It owes no 
more than subsistence to the first, and can give no less to 
the last. What is said about the injustice of a law which 
has no better treatment for the merely unfortunate poor than 
for the ill-conducted, is founded on a misconception of the 
province of law and public authority. The dispensers of 
public relief have no business to be inquisitors. Guardians 
and overseers are not fit to be trusted to give or withhold 
•other people's money according to their verdict on the 
morality of the person soliciting it; and it would show 
much ignorance of the ways of mankind to suppose that 
such persons, even in the almost impossible case of their 



LIMITS OF THE PROVINCE OF GOVERNMENT. 593 

being qualified, will take the trouble of ascertaining and 
sifting the past conduct of a person in distress, so as to form 
a rational judgment on it. Private charity can make these 
distinctions ; and in bestowing its own money, is entitled to 
do so according to its own judgment. It should understand 
that this is its peculiar and appropriate province, and that 
it is commendable or the contrary, as it exercises the func- 
tion with more or less discernment. But the administrators 
of a public fund ought not to be required to do more for 
anybody, than that minimum which is due even to the 
worst. If they are, the indulgence very speedily becomes 
the rale, and refusal the more or less capricious or tyrannical 
exception. 

§ 14. Another class of cases which fall within the same 
general principle as the case of public charity, are those 
in which the acts done by individuals, though intended 
solely for their own benefit, involve consequences extending 
indefinitely beyond them, to interests of the nation or of 
posterity, for which society in its collective capacity is alone 
able, and alone bound, to provide. One of these cases is 
that of Colonization. If it is desirable, as no one will deny 
it to be, that the planting of colonies should be conducted,' 
not with an exclusive view to the private interests of the 
first founders, but with a deliberate regard to the permanent 
welfare of the nations afterwards to arise from these small 
beginnings ; such regard can only be secured by placing 
the enterprise, from its commencement, under regulations 
constructed with the foresight and enlarged views of philo- 
sophical legislators ; and the government alone has power 
either to frame such regulations, or to enforce their obser- 
vance. 

The question of government intervention in the work of 
Colonization involves the future and permanent interests of 
civilization itself, and far outstretches the comparatively 
narrow limits of purely economical considerations. But 
even with a view to those considerations alone, the removal 
77" 



594 BOOK V. CHAPTER XI. §14. 

of population from the overcrowded to the unoccupied parts 
of the earth's surface is one of those works of eminent social 
usefulness, which most require, and which at the same time 
best repay, the intervention of government. 

To appreciate the benefits of colonization, it should be 
considered in its relation, not to a single country, but to the 
collective economical interests of the human race. The 
question is in general treated too exclusively as one of dis- 
tribution ; of relieving one labour-market and supplying 
another. It is this, but it is also a question of production, 
and of the most efficient employment of the productive 
resources of the world. Much has been said of the good 
economy of importing commodities from the place where 
they can be bought cheapest ; while the good economy of 
producing them where they can be produced cheapest, is 
comparatively little thought of. If to carry consumable 
goods from the places where they are superabundant to 
those where they are scarce, is a good pecuniary speculation, 
is it not an equally good speculation to do the same thing 
with regard to labour and instruments ? The exportation 
of labourers and capital from old to new countries, from a 
place where their productive power is less, to a place where 
it is greater, increases by so much the aggregate produce of 
the labour and capital of the world. It adds to the joint 
wealth of the old and the new country, what amounts in a 
short period to many times the mere cost of effecting the 
transport. There needs be no hesitation in affirming that 
Colonization, in the present state of the world, is the best 
affair of business, in which the capital of an old and wealthy 
country can engage. 

It is equally obvious, however, that Colonization on a 
great scale can be undertaken, as an affair of business, only 
by the government, or by some combination of individuals 
in complete understanding with the government ; except 
under such very peculiar circumstances as those which suc- 
ceeded the Irish famine. Emigration on the voluntary 
principle rarely has any material influence in lightening the 



LIMITS OF THE PROVINCE OF GOVERNMENT. 595 

pressure of population in the old country, though as far as 
it goes it is doubtless a benefit to the colony. Those labour- 
ing persons who voluntarily emigrate are seldom the very 
poor ; they are small farmers with some little capital, or 
labourers who have saved something, and who, in removing 
only their own labour from the crowded labour-market, 
withdraw from the capital of the country a fund which 
maintained and employed more labourers than themselves. 
Besides, this portion of the community is so limited in 
number, that it might be removed entirely, without making 
any sensible impression upon the numbers of the population, 
or even upon the annual increase. Any considerable emi- 
gration of labour is only practicable, when its cost is defray- 
ed, or at least advanced, by others than the emigrants them- 
selves. Who then is to advance it ? Naturally, it may be 
said, the capitalists of the colony, who require the labour, 
and who intend to employ it. But to this there is the 
obstacle, that a capitalist, after going to the expense of 
carrying out labourers, has no security that he shall be the 
person to derive any benefit from them. If all the capitalists 
of the colony were to combine, and bear the expense by sub- 
scription, they would still have no security that the labourers, 
when there, would continue to work for them. After work- 
ing for a short time and earning a few pounds, they always, 
unless prevented by the government, squat on unoccupied 
land, and work only for themselves. The experiment has 
been repeatedly tried whether it was possible to enforce 
contracts for labour, or the repayment of the passage-money 
of emigrants to those who advanced it, and the trouble and 
expense have always exceeded the advantage. The only 
other resource is the voluntary contributions of parishes or 
individuals, to rid themselves of surplus labourers who are 
already, or who are likely to become, locally chargeable on 
the poor-rate. Were this speculation to become general, it 
might produce a sufficient amount of emigration to clear off 
the existing unemployed population, but not to raise the 
wages of the employed : and the same thing would require 
to be done over again in less than another generation. 



596 BOOK V. CHAPTER XI. §14. 

One of the principal reasons why Colonization should be 
a national undertaking, is that in this manner alone, save in 
highly exceptional cases, can emigration be self-supporting. 
The exportation of capital and labour to a new country being, 
as before observed, one of the best of all affairs of business, 
it is absurd that it should not, like other affairs of business, 
repay its own expenses. Of the great addition which it makes 
to the produce of the world, there can be no reason why a 
sufficient portion should not be intercepted, and employed in 
reimbursing the outlay incurred in effecting it. For reasons 
already given, no individual or body of individuals, can reim- 
burse themselves for the expense ; the government, however, 
can. It can take from the annual increase of wealth, caused 
by the emigration, the fraction which suffices to repay with 
interest what the emigration has cost. The expenses of emi- 
gration to a colony ought to be borne by the colony ; and 
this, in general, is only possible when they are borne by the 
colonial government. 

Of the modes in which a fund for the support of coloni- 
zation can be raised in the colony, none is comparable in 
advantage to that which was first suggested, and has since 
been so ably and perseveringly advocated, by Mr. Wake- 
field : the plan of putting a price on all unoccupied land, 
and devoting the proceeds to emigration. The unfounded 
and pedantic objections to this plan have been answered in 
a former part of this chapter : we have now to speak of its 
advantages. First, it avoids the difficulties and discontents 
incident to raising a large annual amount by taxation ; a 
thing which it is almost useless to attempt with a scattered 
population of settlers in the wilderness, who, as experience 
proves, can seldom be compelled to pay direct taxes, except 
at a cost exceeding their amount ; while in an infant com- 
munity indirect taxation soon reaches its limit. The sale 
of lands is thus by far the easiest mode of raising the requi- 
site funds. But it has other and still greater recommenda- 
tions. It is a beneficial check upon the tendency of a popu- 
lation of colonists to adopt the tastes and inclinations of 



LIMITS OF THE PROVINCE OF GOVERNMENT. 597 

savage life, and to disperse so widely as to lose all the 
advantages of commerce, of markets, of separation of em- 
ployments, and combination of labour. By making it neces- 
sary for those who emigrate at the expense of the fund, to 
earn a considerable sum before they can become landed 
propietors, it keeps up a perpetual succession of labourers 
for hire, who in every country are a most important auxil- 
iary even to peasant proprietors : and by diminishing the 
eagerness of agricultural speculators to add to their domain, 
it keeps the settlers within reach of each other for purposes of 
co-operation, arranges a numerous body of them within easy 
distance of each centre of foreign commerce and non-agricul- 
tural industry, and ensures the formation and rapid growth 
of towns and town products. This concentration, compared 
with the dispersion which uniformly occurs when unoccupied 
land can be had for nothing, greatly accelerates the attain- 
ment of prosperity, and enlarges the fund which may be 
drawn upon for further emigration. Before the adoption 
of the Wakefield system, the early years of all new colonies 
were full of hardship and difficulty : the last colony founded 
on the old principle, the Swan River settlement, being one 
of the most characteristic instances. In all subsequent colo- 
nization, the Wakefield principle has been acted upon, 
though imperfectly, a part only of the proceeds of the sale 
of land being devoted to emigration : yet wherever it has 
been introduced at all, as in South Australia, Victoria, and 
New Zealand, the restraint put upon the dispersion of the 
settlers, and the influx of capital caused by the assurance of 
being able to obtain hired labour, has, in spite of many diffi- 
culties and much mismanagement, produced a suddenness 
and rapidity of prosperity more like fable than reality.* 

* The objections which have been made, with so much virulence, in some of 
these colonies, to the Wakefield system, apply, in so far as they have any valid- 
ity, not to the principle, but to some provisions which are no part of the system, 
and have been most unnecessarily and improperly engrafted on it ; such as the 
offering only a limited quantity of land for sale, and that by auction, and in lots 
Oi not less than 640 acres, instead of selling all land which is asked for, and 
allowing to the buyer unlimited freedom of choice, both as to quantity and situa- 
tion, at a fixed price. 



598 BOOK V. CHAPTER XI. §14. 

The self-supporting system of colonization, once estab- 
lished, would increase in efficiency every year ; its effect 
would tend to increase in geometrical progression : for since 
every able-bodied emigrant, until the country is fully peo^ 
pled, adds in a very short time to its wealth, over and above 
his own consumption, as much as would defray the expense 
of bringing out another emigrant, it follows that the greater 
the number already sent, the greater number might continue 
to be sent, each emigrant laying the foundation of a succes- 
sion of other emigrants at short intervals without fresh 
expense, until the colony is filled up. It would therefoi-e be 
worth while, to the mother country, to accelerate the early 
stages of this progression, by loans to the colonies for the 
purpose of emigration, repayable from the fund formed by 
the sales of land. In thus advancing the means of accom- 
plishing a large immediate emigration, it would be investing 
that amount of capital in the mode, of all others, most bene- 
ficial to the colony ; and the labour and savings of these 
emigrants would hasten the period at which a large sum 
would be available from sales of land. It would be neces- 
sary, in order not to overstock the labour-market, to act in 
concert with the persons disposed to remove their own cap- 
ital to the colony. The knowledge that a large amount of 
hired labour would be available, in so productive a field of 
employment, would ensure a large emigration of capital from 
a country, like England, of low profits and rapid accumula- 
tion : and it would only be necessary not to send out a 
greater number of labourers at one time, than this capital 
could absorb and employ at high wages. 

Inasmuch as, on this system, any given amount of expen- 
diture, once incurred, would provide not merely a single 
emigration, but a perpetually flowing stream of emigrants, 
which would increase in breadth and depth as it flowed on ; 
this mode of relieving overpopulation has a recommendation, 
not possessed by any other plan ever proposed for making 
head against the consequences of increase without restrain- 
ing the increase itself; there is an element of indefiniteness 



LIMITS OF THE PROVINCE OF GOVERNMENT. 599 

in it ; no one can perfectly foresee how far its influence, as a 
vent for surplus population, might possibly reach. There is 
hence the strongest obligation on the government of a coun- 
try like our own, with a crowded population, and unoccu- 
pied continents under its command, to build, as it were, and 
keep open, a bridge from the mother country to those con- 
tinents, by establishing the self-supporting system of coloniza- 
tion on such a scale, that as great an amount of emigration as 
the colonies can at the time accommodate, may at all times be 
able to take place without cost to the emigrants themselves. 
The importance of these considerations, as regards the 
British islands, has been of late considerably diminished by 
the unparalleled amount of spontaneous emigration from 
Ireland ; an emigration not solely of small farmers, but of 
the poorest class of agricultural labourers, and which is at 
once voluntary and self-supporting, the succession of emi- 
grants being kept up by funds contributed from the earnings 
of their relatives and connexions who had gone before. To 
this has been added a large amount of voluntary emigration 
to the seats of the gold discoveries, which has partly sup- 
plied the wants of our most distant colonies, where, both 
for local and national interests, it was most of all required. 
But the stream of both these emigrations has already con- 
siderably slackened, and it is not certain that the aid of 
government in a systematic form, and on the self-supporting 
principle, will not again become necessary to keep the 
communication open between the hands needing work in 
England, and the work which needs hands elsewhere. 



§ 15. The same principle which points out colonization, 
and the relief of the indigent, as cases to which the prin- 
cipal objection to government interference does not apply, 
extends also to a variety of cases, in which important pub- 
lic services are to be performed, while yet there is no indi- 
vidual specially interested in performing them, nor would 
any adequate remuneration naturally or spontaneously 
attend their performance. Take for instance a voyage 



600 BOOK V. CHAPTER XI. §15. 

of geographical or scientific exploration. The information 
sought may be of great public value, yet no individual 
would derive any benefit from it which would repay the 
expense of fitting out the expedition ; and there is no mode 
of intercepting the benefit on its way to those who profit 
by it, in order to levy a toll for the remuneration of its 
authors. Such voyages are, or might be, undertaken by 
private subscription ; but this is a rare and precarious re- 
source. Instances are more frequent in which the expense 
has been borne by public companies or philanthropic asso. 
ciations ; but in general such enterprises have been conduct- 
ed at the expense of government, which is thus enabled to 
entrust them to the persons in its judgment best qualified 
for the task. Again, it is a proper office of government to 
build and maintain lighthouses, establish buoys, &c, for the 
security of navigation : for since it is impossible that the 
ships at sea which are benefited by a lighthouse, should be 
made to pay a toll on the occasion of its use, no one would 
build lighthouses from motives of personal interest, unless 
indemnified and rewarded from a compulsory levy made by 
the state. There are many scientific researches, of great 
value to a nation and to mankind, requiring assiduous devo- 
tion of time and labour, and not unfrequently great expense, 
by persons who can obtain a high price for their services 
in other ways. If the government had no power to grant 
indemnity for expense, and remuneration for time and labour 
thus employed, such researches could only be undertaken by 
the very few persons who, with an independant fortune, unite 
technical knowledge, laborious habits, and either great 
public spirit, or an ardent desire of scientific celebrity.* 

* Connected with this subject is the question of providing, by means of 
endowments or salaries, for the maintenance of what has been called a learned 
class. The cultivation of speculative knowledge, though one of the most useful 
of all employments, is a service rendered to the community collectively, not indi- 
vidually, and one consequently which it is, prima facie, reasonable that the com- 
munity collectively should pay ; since it gives no claim on any individual for a 
pecuniary remuneration ; and unless a provision is made for such services from 
some public fund, there is not only no encouragement to them, but there is as. 



LIMITS OF THE PROVINCE OF GOVERNMENT. (J01 

It may be said generally, that anything which it is 
desirable should be done for the general interests of man- 
kind or of future generations, or for the present interests 
of those members of the community who require external 
aid, but which is not of a nature to remunerate individuals 
or associations for undertaking it, is in itself a suitable 
thing to be undertaken by government : though, before 

much discouragement as is implied iu the impossibility of gaiuing a living by 
such pursuits, aud the necessity consequently imposed on most of those who 
would be capable of them, to employ the greatest part of their time in gaining a 
subsistence. The evil, however, is greater in appearance than in reality. The 
greatest things, it has been said, have generally been done by those who had the 
least time at their disposal ; and the occupation of some hours every day in a 
routine employment, has often been found compatible with the most brilliant 
achievements in literature and philosophy. Yet there are investigations and ex- 
periments which require not. only a long but a continuous devotion of time and 
attention : there arc also occupations which so engross and fatigue the mental 
laculties, as to be inconsistent with any vigorous employment of them upon 
other subjects, even in intervals of leisure. It is highly desirable, therefore, 
that there should be a mode of ensuring to the public the services of scientific 
discoverers, and perhaps of some other classes of savans, by affording them the 
means of support consistently with devoting a sufficient portion of time to their 
peculiar pursuits. The fellowships of the Universities are an institution excel- 
lently adapted for such a purpose ; but are hardly ever applied to it, being be- 
stowed, at the best, as a reward for past proficiency, in committing to memory 
what has been done by others, and not as the salary of future labours in the ad- 
vancement of knowledge. In some countries, Academies of science, antiquities, 
history, &c, have been formed, with emoluments annexed. The most effectual 
plan, and at the same time the least liable to abuse, seems to be that of confer- 
ring Professorships, with duties of instruction attached to them. The occupa- 
tion of teaching a branch of knowledge, at least in its higher departments, is a 
help rather than an impediment to the systematic cultivation of the subject 
itself. The duties of a professorship almost always leave much time for original 
researches, and the greatest advances which have been made in the various 
sciences, both moral and physical, have originated with those who were public 
teachers of them ; from Plato and Aristotle to the great names of the Scotch, 
French, and German Universities. I do not mention the English, because their 
professorships have been, as is well known, little more than nominal. In the 
case, too, of a lecturer in a great institution of education, the public at large has 
the means of judging, if not the quality of the teaching, at least the talents and 
industry of the teacher ; and it is more difficult to misemploy the power of ap- 
pointment to such an office, than to job in pensions and salaries to persons not 
go directly before the public eye. 



602 BOOK V. CHAPTER XI. §16. 

making the work their own, governments ought always to 
consider if there be any rational probability of its being done 
on what is called the voluntary principle, and if so, whether 
it is likely to be done in a better or more effectual manner 
by government agency, than by the zeal and liberality of 
individuals. 

§ 16. The preceding heads comprise, to the best of my 
judgment, the whole of the exceptions to the practical 
maxim, that the business of society can be best performed 
by private and voluntary agency. It is, however, necessary 
to add, that the intervention of government cannot always 
practically stop short at the limit which defines the cases 
intrinsically suitable for it. In the particular circumstances 
of a given age or nation, there is scarcely anything, really 
important to the general interest, which it may not be 
desirable, or even necessary, that the government should 
take upon itself, not because private individuals cannot 
effectually perform it, but because they will not. At some 
times and places there will be no roads, docks, harbours, 
canals, works of irrigation, hospitals, schools, colleges, print- 
ing presses, unless the government establishes them ; the 
public being either too poor to command the necessary 
resources, or too little advanced in intelligence to appreciate 
the ends, or not sufficiently practised in joint action to be 
capable of the means. This is true, more or less, of all 
countries inured to despotism, and particularly of those in 
which there is a very wide distance in civilization between 
the people and the government : as in those which have 
been conquered and are retained in subjection by a more 
energetic and more cultivated people. In many parts of the 
world, the people can do nothing for themselves which 
requires large means and combined action ; all such things 
are left undone, unless done by the state. In these cases, 
the mode in which the government can most surely demon- 
strate the sincerity with which it intends the greatest good 
of its subjects, is by doing the things which are made incum- 



LIMITS OF THE PROVINCE OF GOVERNMENT. 603 

bent on it by the helplessness of the public, in such a man- 
ner as shall tend not to increase and perpetuate but to cor- 
rect that helplessness. A good government will give all its 
aid in such a shape, as to encourage and nurture any rudi- 
ments it may find of a spirit of individual exertion. It will 
be assiduous in removing obstacles and discouragements to 
voluntary enterprise, and in giving whatever facilities and 
whatever direction and guidance may be necessary : its 
pecuniary means will be applied, when practicable, in aid 
of private efforts rather than in supersession of them, and 
it will call into play its machinery of rewards and honours 
to elicit such efforts. Government aid, when given merely 
in default of private enterprise, should be so given as to be 
as far as possible a course of education for the people in the 
art of accomplishing great objects by individual energy and 
voluntary co-operation. 

I have not thought it necessary here to insist on that 
part of the functions of government which all admit to be 
indispensable, the function of prohibiting and punishing 
such conduct on the part of individuals in the exercise of 
their freedom, as is clearly injurious to other persons, whether 
the case be one of force, fraud, or negligence. Even in the 
best state which society has yet reached, it is lamentable to 
think how great a proportion of all the efforts and talents in 
the world are employed in merely neutralizing one another. 
It is the proper end of government to reduce this wretched 
waste to the smallest possible amount, by taking such 
measures as shall cause the energies now spent by mankind 
in injuring one another, or in protecting themselves against 
injury, to be turned to the legitimate employment of the 
human faculties, that of compelling the powers of nature to 
be more and more subservient to physical and moral good. 



THE END. (40> 



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